UNIVERSITY  OF  CALIFORNIA 
AT    LOS  ANGELES 


COMMERCIAL  LAW 


L^ 


American  Institute  of  Banking 

Section  American  Bankers  Association 
110  East  42  Street  New  York  City 


Copyright,  1921 

by 

American  Institute  of  Banking 


V 


o 


PREFACE 

THE  Institute  standard  course  of  study  in  "Commercia:i 
Law"  is  not  intended  to  make  lawyers,  but  simply  to 
impart  to  bankers  sufficient  knowledge  of  law  to  enable 
them  to  act  in  accordance  with  established  legal  principles, 
and  refer  doubtful  questions  to  a  lawyer.  It  is  not  usurping 
the  functions  of  a  lawyer  for  a  banker  to  know  his  legal  rights 
and  responsibilities.  The  banker  who  does  not  appreciate  the 
importance  of  this  knowledge,  eventually  learns  from,  experi- 
ence, sad  or  otherwise,  that  he  has  neglected  an  important 
part  of  the  training  necessary  to  carry  on  his  business  with 
safety  and  confidence.  This  text-book  is  based  on  the  splendid 
work,  originally  prepared  for  the  Institute,  by  Samuel  Willis- 
ton,  Weld  Professor  of  Law  in  Harvard  Law  School.  To  this 
original  matter,  however,  much  new  material  has  been  added, 
cases  have  been  cited,  and  new  chapters  on  Master  and  Ser- 
vant, Estates  and  Trusts,  Bills  and  Notes,  and  Torts  and 
Crimes  added.  The  work  of  preparing  "Commercial  Law" 
has  been  done  jointly  by  Richard  D.  Currier,  President  of  the 
New  Jersey  Law  School,  and  Richard  W.  Hill,  member  of  the 
New  York  Bar  and  Secretary  of  the  American  Institute  of 
Banking.  The  main  purpose  of  this  book  is  to  teach  bankers 
to  recognize  the  danger  signals  in  law,  when  they  appear,  and 
thus  be  able  to  distinguish  between  law  and  law  suits. 


386367 


INSTITUTE  PLATFORM 


RESOLUTION  adopted  at  the  New  Orleans  Convention 
of  the  American  Institute  of  Banking,  October  9,  1919: 
"Ours  is  an  educational  association  organized  for 
the  benefit  of  the  banking  fraternity  of  the  country  and  within 
our  membership  may  be  found  on  an  equal  basis  both  em- 
ployees and  employers;  and  in  full  appreciation  of  the  oppor- 
tunities which  our  country  and  its  established  institutions 
afford,  and  especially  in  appreciation  of  the  fact  that  the 
profession  of  banking  affords  to  its  diligent  and  loyal  members 
especial  opportunities  for  promotion  to  official  and  managerial 
positions,  and  that  as  a  result  of  the  establishment  and  main- 
tenance of  the  merit  system  in  most  banks  a  large  number 
of  Institute  members  have  through  individual  application 
achieved  marked  professional  success,  we  at  all  times  and 
under  all  circumstances  stand  for  the  merit  system  and  for 
the  paying  of  salaries  according  to  the  value  of  the  service 
rendered. 

"We  believe  in  the  equitable  cooperation  of  employees 
and  employers  and  are  opposed  to  all  attempts  to  limit  indi- 
vidual initiative  and  curtail  production,  and,  insofar  as  our 
profession  is  concerned,  are  unalterably  opposed  to  any  plan 
purporting  to  promote  the  material  welfare  of  our  members, 
individually  or  collectively,  on  any  other  basis  than  that  of 
efficiency,  loyalty  and  unadulterated  Americanism." 


CONTENTS 


Chapter  Page 

Introduction 7 

I.  Contracts — Mutual  Assent 24 

II.  Contracts — Consideration  and  Enforceability  . .  57 

III.  Contracts — Performance  and  Termination..  ..  86 

IV.  Principal  and  Agent;  Master  and  Servant..  ..  121 

V.  Partnerships 163 

VI.  Corporations   192 

VII.  Transfer  of  Stock 238 

VIII.  Personal  Property 258 

IX.  Real  Property  298 

X.  Estates  and  Trusts 321 

XI.  Carriers  and  Warehousemen 344 

XII.  Bills  and  Notes 378 

XIII.  Torts  and  Crimes 405 

XIV.  Miscellaneous    425 


WHO  IS  A  BANKER? 


A  SUCCESSFUL  BANKER  is 
composed  of  about  one-fifth 
accountant,  two-fifths  lawyer,  three- 
fifths  political  economist,  and  four- 
fifths  gentleman  and  scholar — total 
ten-fifths — double  size.  Any  smaller 
person  may  be  a  pawnbroker  or 
a  promoter,  but  not  a  banker. — 
George  E.  Allen. 


Commercial  Law 


INTRODUCTION 

DEFINITION  OF  LAW.— The  term  "law"  is 
used  in  many  ways.  We  speak  of  moral  law, 
law  of  gravity,  divine  law,  and  the  like.  In  each 
case  we  are  making  proper  use  of  the  term,  but  in  no 
instance  are  we  using  it  as  we  shall  use  it  in  this  book. 
To  illustrate :  You  find  a  beggar  on  your  front  porch 
when  entering  your  house  late  at  night.  Suppose  he 
should  ask  you  for  food  and  lodging  for  the  night. 
Although  there  is  no  other  house  within  five  miles  of 
your  home,  you  refuse  to  take  him  in,  or  do  anything 
for  him.  As  a  result  he  contracts  pneumonia  from 
exposure,  because  he  is  not  able  to  proceed  further. 
You  would,  nevertheless,  not  be  liable  in  the  sense  in 
which  we  are  using  the  term  "law."  But,  you  say,  in 
an  extreme  case  of  this  kind,  it  is  one's  duty  to  act. 
We  grant  it,  but  to  be  accurate,  you  must  preface  your 
proposition  with  the  statement,  "under  the  moral  law" 
or  "under  divine  law  it  is  one's  duty  to  act  in  such  a 
case."  However  much  it  is  to  be  regretted  that  moral  or 
divine  law  sometimes  does  not  harmonize  with  "law" 
as  we  shall  treat  it,  we  must,  nevertheless,  recognize 
that  fact.  Law,  as  viewed  by  the  jurist,  and  this  is  the 
way  we,  as  students,  are  to  consider  it,  is  defined  by 
Blackstone  to  be  "A  rule  of  civil  conduct  prescribed 
by  the  supreme  power  in  the  State,  commanding  what 
is  right,  and  prohibiting  what  is  wrong."    Referring 

7 


8  COMMERCIAL   LAW 

again  to  our  illustration,  is  it  not  easy  to  see  that  it 
would  be  impracticable  in  the  present  condition  of  so- 
ciety for  the  legislature  of  California,  for  example, 
to  pass  a  law  which  should,  in  that  State,  constitute 
"a  rule  of  civil  conduct"  commanding  that  every  one 
"shall  be  his  brother's  keeper"  and  for  a  violation 
thereof  "shall  be  imprisoned  for  one  year,  or  fined  one 
thousand  dollars,  or  both."  However  much  we  recog- 
nize the  obligation  of  moral  law,  jurists  and  legislators 
cannot  ignore  the  fact  that  society  is  composed  of  ordi- 
nary human  beings,  still  far  from  perfection.  Assum- 
ing, although  perhaps  it  is  doubtful,  that  it  is  within 
the  power  of  the  legislature  of  California  to  pass  such 
an  act  as  has  been  suggested,  there  are  not  courts 
enough  in  the  whole  United  States  to  decide  the  cases 
which  would  arise  in  New  York  City  alone  in  attempt- 
ing to  apply  the  provisions  of  such  an  act.  On  second 
thought,  then,  it  is  not  such  a  startling  proposition 
for  us  to  learn  that  "law"  is  not  synonymous 
with  the  same  term  when  used  in  referring  to  natural 
law,  moral  law,  and  the  like.  Much  has  been  written 
on  the  essential  nature  of  "law"  as  we  shall  use  the 
term.  The  time-honored  definition  of  Blackstone, 
which  we  have  quoted,  is  confessedly  imperfect.  The 
last  clause,  "commanding  what  is  RIGHT,  and  pro- 
hibiting what  is  WRONG"  has  been  much  criticized, 
and  Mr.  Chitty  has  modified  it  to  "commanding  what 
shall  be  done,  and  what  shall  not  be  done."  Today, 
to  attempt  to  buy  a  bottle  of  light  wine  at  a  hotel  does 
not  seem  to  many  of  us  intrinsically  WRONG,  but 
legally,  under  existing  laws,  it  is,  and  so  perhaps  Mr. 


COMMERCIAL    LAW  9 

Chitty's  modification  of  Blackstone's  definition  dees 
bring  out  the  correct  idea  more  clearly.  For  our 
purpose,  these  two  definitions  are  sufficient. 

THE  SYSTEMS  OF  LAW.— There  are  two 
chief  systems  of  law  in  use  among  civilized  peoples 
today,  the  Roman  or  civil  law,  and,  the  English  or 
common  law.  The  Roman,  or  civil  law  (Roman  law  is 
spoken  of  as  civil  law,  from  the  Latin  *'civilis,"  belong- 
ing to  a  citizen)  as  its  name  implies,  originated  in 
Rome.  As  the  city  of  Rome  developed  into  the  Roman 
Empire,  its  law  became  that  of  the  ancient  world.  It 
was  finally  codified  by  the  Roman  Emperor  Justinian, 
in  the  year  530  A.D.,  and  was  eventually  absorbed, 
from  the  twelfth  to  the  eighteenth  century,  into  the 
law  of  modern  Europe.  It  is  the  basis  of  the  systems 
of  law  used  in  the  countries  of  continental  Europe, 
Central  and  South  America,  and  all  French,  Spanish, 
Portuguese,  and  Dutch  colonies  or  countries  settled 
by  those  peoples. 

COMMON  LAW.— The  common  law  had  its 
roots  in  the  customary  law  of  the  Germanic  peoples 
of  western  Europe,  and  was  developed  by  the  English 
courts  from  the  thirteenth  to  the  nineteenth  centuries. 
Like  the  Roman  law,  it  has  spread  all  over  the  world 
wherever  English-speaking  peoples  have  settled,  and 
founded  colonies.  The  common  law  now  prevails  in 
England,  Canada  (except  Quebec),  India,  except  over 
Hindus  and  Mohammedans  in  certain  instances,  and 
the  principal  British  colonies,  except  those  in  South 
Africa.  The  United  States  is  largely  an  English  set- 
tlement, hence  the  common  law  prevails  with  us, 


10  COMMERCIAL    LAW 

except  in  the  State  of  Louisiana,  where  the  influence 
of  the  French  and  Spanish  settlements  still  remains 
and  makes  the  basis  of  the  Louisiana  law  the  Roman 
law,  and  in  the  Philippines  and  Porto  Rico,  where  the 
law  was  Roman  when  we  took  those  possessions  from 
Spain  in  1898. 

THE  SOURCE  OF  LAW.— Where  does  this  rule 
of  civil  conduct  we  are  to  study  come  from?  At  first 
blush,  the  superficial  observer  might  suggest  some 
legislative  hall  where  it  is  created  by  a  legislative  body, 
a  perfect  product,  to  be  imposed  on  men  and  women 
as  the  guide  in  their  every  act  in  civil  life.  The  slight- 
est reference  to  historical  jurisprudence  will  convince 
us  that  this  is  not  the  true  source  of  the  law.  Mr.  Jus- 
tice Holmes  of  the  United  States  Supreme  Court,  in 
his  classic,  "The  Common  Law,"  indicates  the  real 
source  of  law  when  he  observes :  "The  life  of  the  law 
has  not  been  logic;  it  has  been  experience.  The  felt 
necessities  of  the  time,  the  prevalent  moral  and  polit- 
ical theories,  intuitions  of  public  policy,  avowed  or 
unconscious,  even  the  prejudices  which  judges  share 
with  their  fellow-men,  have  had  a  good  deal  more  to 
do  than  the  syllogism  in  determining  the  rules  by 
which  men  should  be  governed.  The  law  embodies  the 
story  of  a  nation's  development  through  many  centu- 
ries, and  it  cannot  be  dealt  with  as  if  it  contained  only 
the  axioms  and  corollaries  of  a  book  of  mathematics. 
In  order  to  know  what  it  is,  we  must  know  what  it  has 
been,  and  what  it  tends  to  become.  We  must  alter- 
nately consult  history  and  existing  theories  of  legisla- 
tion. But  the  most  difficult  labor  will  be  to  understand 


COMMERCIAL    LAW  11 

the  combination  of  the  two  into  new  products  at  every 
stage.  The  substance  of  the  law  at  any  given  time 
pretty  nearly  corresponds,  so  far  as  it  goes,  with  what 
is  then  understood  to  be  convenient ;  but  its  form  and 
machinery,  and  the  degree  to  which  it  is  able  to  work 
out  desired  results,  depend  very  much  upon  its  past." 

WHERE  TO  LOOK  FOR  LAW.— Knowing  the 
source  of  law  does  not  necessarily  tell  us  where  to  look 
for  the  law.  Today,  in  the  United  States,  we  have 
three  primary  sources  to  which  the  lawyer  goes  to 
seek  the  law  on  any  particular  point.  First,  the  Consti- 
tution of  the  United  States  and  the  Constitution  of 
the  State  in  which  he  is  to  ascertain  the  law,  including 
the  statutes  which  have  been  enacted  by  Congress  and 
by  the  State  legislature  under  those  constitutions.  Sec- 
ond, the  decisions  of  the  courts,  particularly  those  of 
the  United  States  courts  and  of  the  State  where  he 
wishes  to  learn  the  law,  and,  if  need  be,  the  decisions 
of  other  States.  Third,  text-books  and  treatises  on  the 
branch  of  law  to  be  investigated. 

ILLUSTRATION.— Let  us  suppose  you  wish  to 
ascertain  the  law  concerning  a  question  that  comes  up 
in  your  own  daily  life.  Take  two  problems.  First :  We 
will  assume  you  keep  a  clothing  store,  and  an  infant, 
twenty  years  old,  purchases  a  suit  of  winter  clothes. 
His  income  is  $1000  per  year.  He  already  has  two 
perfectly  good  winter  suits.  A  week  after  purchasing 
this  suit,  he  returns  it  and  demands  his  money  back. 
You  wish  to  know  whether  you  have  to  give  it  to  him. 
If  you  should  look  in  the  Constitution  of  the  United 
States,  or  of  the  State  of  Vermont  (assuming  this  to 


12  COMMERCIAL    LAW 

be  a  Vermont  contract),  you  would  find  nothing  that 
would  give  you  any  help  in  answering  this  question. 
If  you  should  look  through  all  of  the  acts  of  Congress 
and  the  laws  passed  by  the  legislature  of  the  State  of 
Vermont,  you  would  find  nothing  to  give  you  any 
help.  If,  however,  you  should  look  in  the  decisions  of 
the  courts,  both  of  the  United  States  and  of  the  State 
of  Vermont,  you  would  find  cases,  probably  many  of 
them,  covering  this  particular  situation,  and  you 
would  find  the  rule  to  be  laid  down  as  law,  that  an 
infant  (and  by  an  infant  we  mean  anyone  under 
twenty-one  years)  is  not  liable  on  his  contracts,  except 
for  necessities,  and  then  only  in  a  quasi-contractual 
action  for  their  reasonable  value.  Applying  the  law  to 
the  problem,  you  would  be  obliged  to  admit  the  legal- 
ity of  the  infant's  claim,  and  if  you  did  not  refund  the 
money  to  him,  he  would  be  entitled  to  sue  for  it  in  a 
court.  Three  winter  suits  are  clearly  not  necessaries 
at  one  time  for  an  infant  with  an  income  no  greater 
than  $1000  per  year.  This  is  a  comparatively  simple 
problem.  Now  let  us  take  another  case  somewhat 
more  difficult.  You  live  in  New  Jersey  near  the  plant 
of  an  airplane  manufacturing  company.  Machines  are 
constantly  being  tried  out,  and  they  circle  over  your 
premises  within  four  or  five  hundred  feet  from  the 
ground.  You  have  several  children  who  are  using  your 
back  yard  as  a  playground  and  you  are  much  alarmed, 
fearing  that  an  airplane  may  fall  in  the  yard  and  kill 
or  injure  a  child.  You  wish  to  ascertain  your  rights. 
You  look  in  the  Constitution  of  the  United  States,  and 
of  the  State  of  New  Jersey.   You  will  find  nothing  in 


COMMERCIAL    LAW  13 

either  about  airplanes.  You  look  in  the  acts  of  Con- 
gress and  the  laws  of  the  legislature  of  the  State  of 
New  Jersey.  You  will  find  nothing  there  to  help  you. 
You  look  in  the  decisions  of  the  courts,  both  of  the 
United  States  and  of  the  State  of  New  Jersey.  You 
will  find  nothing  there.  You  look  in  the  text-books, 
and,  except  in  the  most  recent,  in  all  probability  you 
will  find  nothing  there  in  regard  to  airplanes.  You 
may  search  the  recent  legal  publications  and  you  will 
find  articles  discussing  in  a  purely  theoretical  way  this 
interesting  topic.  You  study  recent  legislation  and 
you  v/ill  find  stray  instances  of  attempts  to  deal  with 
aerial  matters.  For  example,  Connecticut  has  a  statute 
on  airplanes.  In  fact,  your  whole  search  will  be  most 
interesting.  All  you  will  find,  however,  is  not  law  in 
New  Jersey,  but  is  simply  theory,  based  on  common 
law  principles  or  statutes  having  no  force  in  New  Jer- 
sey. Should  you  then  conclude  that  you  have  no  rights, 
that  the  law  cannot  help  you?  Perhaps  not.  If  you 
turn  to  treatises  relating  to  the  ownership  of  land  as 
developed  in  the  English  common  law  and  as  applied 
by  the  courts  in  the  United  States,  you  will  find  that 
the  word  *'land"  is  often  used  as  practically  synony- 
mous with  realty  or  ground  or  soil,  and  you  will  also 
find  that  it  includes  everything  attached  to  the  realty 
or  growing  on  it.  As  is  commonly  said,  land  has  an 
indefinite  extent  upward  as  well  as  downward,  the  old 
books  using  the  Latin  maxim:  "Cuius  est  solum,  eius 
est  usque  ad  coelum  usque  ad  orcum."  (To  whomso- 
ever the  soil  belongs,  he  owns  also  to  the  sky  and  to 
the  depths.) 


14  COMMERCIAL   LAW 

There  are  three  houses  in  a  row  on  Smith 
Street,  Nos.  1,  3  and  5.  Mary  Jones  lives  in  No.  1,  and 
Sarah  Green  in  No.  5.  They  are  friends,  and  accor- 
dingly arrange  to  stretch  their  clotheslines  from  their 
rear  second-story  windows  across  the  back  yard  of 
No.  3.  Under  common  law  principles,  this  is  a  trespass 
upon  No.  3.  Should  Mary  Jones  and  Sarah  Green  con- 
tinue to  do  this  for  the  required  time,  usually  twenty 
years,  they  would  acquire  by  prescription  a  permanent 
right  to  stretch  clotheslines  over  lot  No.  3.  When  the 
owner  of  lot  No.  3  wished  to  erect  a  ten-story  building 
covering  all  of  his  lot,  he  would  be  seriously  interfered 
v/ith  by  the  right  acquired  by  his  two  adjoining  neigh- 
bors. He  could  have  protected  himself  by  proper 
action  in  a  court  when  the  offense  was  first  committed. 
Could  not,  therefore,  the  court  take  this  principle  of 
the  common  law  as  to  the  ownership  of  land  and  apply 
it  to  the  airplane  case?  If  the  owner  of  lot  No.  3  could 
prevent  the  owners  of  lots  Nos.  1  and  5  from  stretch- 
ing clotheslines  across  his  land,  could  you  not  prevent 
the  airplane  from  crossing  your  land,  although  it  is 
five  hundred  feet  above  the  surface  of  the  soil?  Twenty 
years'  continuation  of  that  practice  would  interfere 
with  your  ability  to  build  a  Woolworth  building 
twenty-five  years  from  now  should  you  desire  to  do  so. 
It  is  simply  taking  an  old  principle  of  law  recognized 
for  centuries,  and  applying  it  to  new  conditions.  This 
is  what  we  mean  when  we  say  that  the  principles  of 
common  law  are  capable  of  indefinite  expansion ;  that 
the  common  law  is  always  growing,  or,  as  Mr.  Justice 
Holmes  puts  it,  it  is  the  product  of  "the  felt  necessi- 


COMMERCIAL    LAW  15 

ties  of  the  time."  As  soon,  however,  as  you  have  se- 
cured an  injunction  from  the  court  preventing  the 
airplane  factory  from  practicing  its  machines  over 
your  land,  all  of  the  other  property  owners  in  the 
neighborhood  of  the  factory  decide  to  protect  their 
rights,  with  the  result  that  no  airplane  can  leave  the 
factory  through  the  air.  Does  this  mean  that  the 
airplane  factory  must  move,  and  probably  be  sub- 
jected to  the  same  annoyances  in  its  new  location  in 
a  short  time?  We  are  coming  to  realize  that  airplanes 
are  necessities.  When  a  necessity  and  a  principle 
of  law  cannot  exist  side  by  side,  something  must 
be  done  to  remedy  an  intolerable  situation.  The 
illustration  here  used  presents  what  in  the  course 
of  a  few  years,  undoubtedly,  will  become  an  intol- 
erable situation,  unless  remedied  in  some  way.  It 
has  been  suggested  that  we  must  modify  our  principles 
of  the  ownership  of  land,  and  give  airplanes  the  right 
of  free  passage  over  the  land  of  any  person,  when  a 
certain  distance  in  the  air,  far  enough  up  to  cause  no 
great  amount  of  danger  or  annoyance.  Such  a  change 
in  the  law  would  have  to  be  accomplished  by  the  State 
legislature  or  by  an  act  of  Congress  for  such  territory 
as  Congress  has  jurisdiction  over.  No  doubt,  legisla- 
tion along  such  lines  may  be  expected  soon.  It  will  be 
simply  a  repetition  of  a  situation  created  by  a  leading 
case  in  New  York  in  1902. 

In  Roberson  v.  The  Rochester  Folding  Box 
Company,  171  New  York  538,  the  suit  was 
brought  on  behalf  of  a  living  person,  a  young 
lady,  to  restrain  a  flour  company  from  putting  her 


16  COMMERCIAL   LAW 

likeness  upon  prints  advertising  its  flour.  Mr.  Justice 
Parker,  writing  the  opinion  of  the  court,  held  that 
there  was  no  principle  of  law  which  would  author- 
ize the  court  to  issue  an  injunction  restraining  this 
unauthorized  use  of  a  photograph.  This  created  the 
unfortunate  situation  in  the  State  of  New  York  of 
allowing  anyone  to  make  use  of  another's  photograph 
without  that  person's  consent,  for  advertising  or  other 
purposes.  The  court,  in  its  opinion,  admitted  the  un- 
fortunateness  of  the  situation,  observing  that  "The 
legislative  body  could  very  well  interfere  and  arbitra- 
rily provide  that  no  one  should  be  permitted  for  his 
own  selfish  purpose  to  use  the  picture  or  the  name 
of  another  for  advertising  purposes  without  his  con- 
sent. In  such  event  no  embarrassment  would  result 
to  the  general  body  of  the  law,  for  the  rule  would  be 
applicable  only  to  cases  provided  for  by  statute.  The 
courts  however,  being  without  authority  to  legislate, 
are  required  to  decide  cases  upon  principle,  and  so 
are  necessarily  embarrassed  by  precedents  created  by 
an  extreme,  and  therefore  unjustifiable  application  of 
an  old  principle.  The  court  below  properly  said  that : 
'While  it  may  be  true  that  the  fact  that  no  precedent 
can  be  found  to  sustain  an  action  in  any  given  case  is 
cogent  evidence  that  a  principle  does  not  exist  upon 
which  the  right  may  be  based,  it  is  not  the  rule  that 
the  want  of  a  precedent  is  a  sufficient  reason  for  turn- 
ing the  plaintiff  out  of  court,'  provided  (I  think  should 
be  added),"  Mr.  Justice  Parker  continues,  "there  can 
be  found  a  clear  and  unequivocal  principle  of  the  com- 
mon law,  which  either  directly  or  mediately  governs 


COMMERCIAL    LAW  17 

it,  or  which,  by  analogy  or  parity  of  reasoning,  ought 
to  govern  it."  ReHef  was  denied  the  young  lady.  The 
following  session  of  the  legislature  corrected  the  evil 
by  passing  a  law  making  it  a  criminal  offense  to  use 
another's  photograph  without  that  person's  consent. 
This  has  been  a  long  illustration.  It  has  served  its 
purpose  best  if  it  has  left  the  very  distinct  impression 
that  the  law  is  a  vital,  living,  growing  thing.  True, 
its  roots  are  in  the  dim  past,  but  it  lives,  and  moves, 
and  has  its  being  in  the  problems  of  today.  In  no  field 
of  law  is  this  more  true  than  in  our  subject.  Commer- 
cial Law. 

WHO  KNOWS  THE  LAW.— The  layman  is 
frequently  of  the  opinion  that  a  lawyer  ought  to  be 
able  to  give  him  a  definite  answer  as  to  just  what  the 
law  is  in  a  given  set  of  facts.  Why  is  it  not  possible 
to  go  to  the  sources  which  we  have"  been  discussing 
and  from  them  ascertain  definitely  what  the  law  is  in 
a  given  case?  Frequently  the  lawyer  can  do  this,  but 
one  should  not  lose  respect  for  the  lawyer  because 
he  is  not,  in  many  cases,  willing  to  give  a  definite 
answer,  but  may  frame  his  reply  in  an  opinion  begin- 
ning "It  would  seem  that  the  law  in  this  case  would 
be,  etc. — "  We  have  already  suggested  some  of  the 
difficulties  that  in  part  answer  the  question  we  now 
ask.  Let  us  take  one  more  illustration,  a  striking  ex- 
ample from  the  United  States  Supreme  Court.  Few 
would  question  the  statement  that  that  Court  is  the 
highest  type  of  judicial  body  in  the  world  today.  We 
are  familiar  with  the  rent  profiteering  legislation  en- 
acted in  the  District  of  Columbia,  New  York  and  at 


18  COMMERCIAL    LAW 

least  five  other  States,  as  a  result  of  the  house  shortage 
created  by  the  world  war.  The  United  States  Supreme 
Court,  in  the  cases  of  Block  v.  Hirsh,  254  U.  S.  531 
and  Marcus  Brown  Holding  Co.  v.  Feldman  et  al., 
254  U.  S.  539,  held  the  New  York  and  the  District  of 
Columbia  rent  profiteering  laws  to  be  constitutional, 
but  this  decision  is  by  a  vote  of  five  to  four,  and  the 
arguments  advanced  in  the  two  opinions,  one  by  Mr. 
Justice  Holmes,  representing  the  majority  of  the  court, 
and  the  other  by  Mr.  Justice  McKenna,  are  striking 
examples  of  how  strongly  the  ablest  body  of  jurists 
in  the  United  States  can  differ  on  a  legal  question. 
Speaking  for  the  majority  in  Block  v.  Hirsh,  Mr.  Jus- 
tice Holmes  says:  "The  main  point  against  the  law 
is  that  tenants  are  allowed  to  remain  in  possession  at 
the  same  rent  that  they  have  been  paying,  unless  mod- 
ified by  the  commission  established  by  the  act,  and 
that  thus  the  use  of  the  land  and  the  right  of  the  owner 
to  do  what  he  will  with  his  own  and  to  make  what 
contracts  he  pleases  are  cut  down.  But  if  the  public 
interest  be  established,  the  regulation  of  rates  is  one 
of  the  first  forms  in  which  it  is  asserted,  and  the  valid- 
ity of  such  regulation  has  been  settled  since  Munn  v. 
Illinois,  94  U.  S.  113.  It  is  said  that  a  grain  elevator 
may  go  out  of  business,  whereas  here  the  use  is  fas- 
tened upon  the  land.  The  power  to  go  out  of  business, 
when  it  exists,  is  an  illusory  answer  to  gas  companies 
and  waterworks,  but  we  need  not  stop  at  that.  The 
regulation  is  put  and  justified  only  as  a  temporary 
measure.  *  *  *  A  limit  in  time,  to  tide  over  a  passing 
trouble,  well  may  justify  a  law  that  could  not  be  up- 


COMMERCIAL    LAW  19 

held  as  a  permanent  change."  In  the  case  of  Marcus 
Brown  Holding  Co.  v.  Feldman,  involving  a  similar 
New  York  law,  Mr.  Justice  Holmes  says :  "The  chief 
objections  to  these  acts  have  been  dealt  with  in  Block 
V.  Hirsh,  supra.  In  the  present  case  more  emphasis  is 
laid  upon  the  impairment  of  the  obligation  of  the  con- 
tract of  the  lessees  to  surrender  possession,  and  of  the 
new  lease,  which  was  to  have  gone  into  effect  upon 
October  1,  last  year.  But  contracts  are  made  subject 
to  this  exercise  of  the  power  of  the  State  when  other- 
wise justified,  as  we  have  held  this  to  be."  Mr.  Justice  • 
McKenna,  in  writing  the  dissenting  opinion  in  Block 
v.  Hirsh,  supra,  and  with  whom  the  late  Chief  Justice 
White,  and  Justices  Van  Devanter  and  McReynolds 
concurred,  says:  "If  such  exercise  of  government  be 
legal,  what  exercise  of  government  is  illegal?  Houses 
are  a  necessary  of  life,  but  other  things  are  as  neces- 
sary. May  they,  too,  be  taken  from  the  direction  of 
their  owners  and  disposed  of  by  the  Government? 
*  *  *  An  affirmative  answer  seems  to  be  the  require- 
ment of  the  decision.  If  the  public  interest  may  be  con- 
cerned, as  in  the  statute  under  review,  with  the  control 
of  any  form  of  property,  it  can  be  concerned  with 
the  control  of  all  forms  of  property.  And,  certainly, 
in  the  first  instance,  the  necessity  or  expediency  of 
control  must  be  a  matter  of  legislative  judgment.  *  *  * 
The  facts  are  significant  and  suggest  this  inquiry: 
Have  conditions  come  not  only  to  the  District  of 
Columbia,  embarrassing  the  Federal  government,  but 
to  the  world  as  well,  that  are  not  amenable  to  pass- 
ing palliatives,  and  that  socialism,  or  some  form  of 


20  COMMERCIAL    LAW 

socialism,  is  the  only  permanent  corrective  or  accom- 
modation? It  is  indeed  strange  that  this  court,  in 
effect,  is  called  upon  to  make  way  for  it,  and  through 
an  instrument  of  a  constitution  based  on  personal 
rights  and  the  purposeful  encouragement  of  indi- 
vidual incentive  and  energy,  to  declare  legal  a  power 
exerted  for  their  destruction.  The  inquiry  occurs, 
have  we  come  to  the  realization  of  the  observation 
that  'War,  unless  it  be  fought  for  liberty,  is  the  most 
deadly  enemy  of  liberty.'  " 

In  the  Marcus  Brown  Holding  Co.  case,  he  again 
says  for  the  same  justices:  "We  are  not  disposed  to 
further  enlarge  upon  the  case,  or  attempt  to  reconcile 
the  explicit  declaration  of  the  Constitution  against  the 
power  of  the  state  to  impair  the  obligations  of  a  con- 
tract, or,  under  any  pretense,  to  disregard  the  declara- 
tion. It  is  safer,  saner,  and  more  consonant  with 
constitutional  pre-eminence  and  its  purposes,  to 
regard  the  declaration  of  the  Constitution  as  para- 
mount, and  not  to  weaken  it  by  refined  dialectics,  or 
bend  it  to  some  impulse  of  emergency  because  of 
some  accident  of  immediate  overwhelming  interest 
which  appeals  to  the  feelings  and  distorts  the  judg- 
ment.' "  No  more  striking  illustration  of  the  most 
decided  differences  of  opinion  among  nine  of  the  ablest 
jurists  in  the  world  can  be  found.  It  is  no  wonder  then 
that  a  lawyer  at  times  hesitates  in  giving  an  opinion  as 
to  what  the  law  may  be. 

THE  FUNCTION  OF  THE  COURT.— An 
infant  bought  a  motorcycle  on  an  instalment  contract 
at  the  agreed  price  of  $325.   He  made  an  initial  pay- 


COMMERCIAL    LAW  21 

merit  of  $125,  used  the  machine  a  month,  damaged  it 
to  the  amount  of  $156.25,  and  then  returned  it  in  this 
condition  and  demanded  the  return  of  his  $125.  These 
are  the  facts  in  the  case  of  Petit  v.  Liston,  97  Oregon 
464,  a  case  decided  in  the  Supreme  Court  of  Ore- 
gon. The  case  involves  the  right  of  an  infant  to  dis- 
affirm a  contract  made  by  him,  when  purchasing  an 
article  which  is  not  a  necessity.  The  Oregon  court 
had  never  before  been  called  on  to  determine  what 
the  law  in  Oregon  was  as  applied  to  such  a  situation. 
According  to  the  rule  in  New  York,  as  laid  down  in 
Rice  V.  Butler,  160  N.  Y.  578,  the  infant  could  not 
recover  the  $125,  but  according  to  the  rule  in  Pyne  v. 
Wood,  145  Mass.  558,  the  infant  would  be  entitled  to 
his  money.  It  thus  became  the  problem  of  the  Oregon 
court  to  refer  to  the  theories  back  of  these  two  deci- 
sions. After  doing  so,  it  approved  of  the  New  York 
view,  rather  than  the  Massachusetts  view.  This  case 
indicates  the  function  of  a  court.  If  a  court,  from  the 
various  sources  of  law  which  we  have  enumerated,  can 
find  an  exact  precedent  for  the  case  before  it,  or  can 
find  a  general  principle  of  law  which  can  be  applied, 
it  renders  a  decision  as  to  the  law,  as  the  Oregon  court 
did.  If  no  law  can  be  found  nor  any  principles  which 
can  be  applied,  the  court  is  forced  to  deny  the  relief, 
as  in  the  Roberson  case,  171  N.  Y.  538,  adding,  per- 
haps, to  its  opinion,  as  it  did  in  that  case,  the  sugges- 
tion that  it  is  a  matter  Congress  or  a  State  legislature 
might  properly  remedy. 

THE  COURT  SYSTEM.— Knowing  the  func- 
tion of  a  court,  the  student  should  then  have  an  outline 


22  COMMERCIAL    LAW 

of  the  court  system  of  his  own  jurisdiction.  We  can 
only  sketch,  in  a  book  to  be  used  generally  throughout 
the  United  States,  the  court  systems.  Each  State  has 
two  sets  of  courts:  the  Federal  and  the  State  courts. 
We  have  a  Federal  and  a  State  Government ;  it  follows 
that  there  should  be  courts  to  interpret  the  laws  of 
each  of  these  two  Governments.  Matters  pertaining 
to  the  United  States  Constitution,  or  matters  affecting 
citizens  of  different  States,  are  tried  in  the  Federal 
courts.  The  same  is  true  of  admiralty  and  bankruptcy. 
There  is  at  least  one  United  States  District  Court  in 
each  State  in  the  country,  and  Federal  cases  are  begun 
in  these  courts.  If  either  party  is  dissatisfied  with  the 
decision,  he  may  appeal  to  the  next  higher  court.  The 
entire  country  is  divided  into  nine  Circuit  Courts  of 
Appeal,  to  which  appeals  from  United  States  District 
Courts  are  taken.  In  case  either  party  is  dissatisfied 
with  the  decision  in  that  court,  he  may,  in  certain 
cases,  appeal  to  the  court  of  last  resort,  the  United 
States  Supreme  Court,  presided  over  by  a  Chief  Jus- 
tice and  eight  Associate  Justices  at  Washington.  Each 
State  has  its  own  system  of  courts.  Usually  that  sys- 
tem is  more  elaborate  than  that  in  the  Federal  Govern- 
ment. There  is  in  each  State  a  court  of  last  resort, 
which  we  would  expect  to  find  designated  the  Supreme 
Court  of  New  York,  or  whatever  State  it  might  be. 
Frequently  there  is  a  misuse  of  terms,  as,  for  example, 
the  court  of  last  resort  in  New  York  is  the  Court  of 
Appeals,  and  the  Supreme  Court  is  a  lower  court. 
This  is  true  in  a  number  of  States.  In  addition  to  the 
court  of  last  resort,  there  will  be  a  court  of  general 


COMMERCIAL    LAW  23 

jurisdiction,  frequently  one  of  these  courts  for  each 
county  of  the  State,  and  then  courts  for  the  trial  of 
smaller  cases  in  the  various  cities  and  towns.  The 
system  of  appeals  is  the  same  as  in  the  Federal  courts, 
either  party  who  is  dissatisfied  having  a  right  to  appeal 
his  case  to  the  higher  court.  The  question  as  to 
whether  a  particular  case  must  be  brought  in  a  Fed- 
eral court  or  a  State  court  is  too  complicated  to  be 
taken  up  in  detail.  Sometimes  the  suit  must  be  brought 
in  the  Federal  court,  as,  for  example,  a  bankruptcy 
matter,  or  a  matter  involving  the  United  States  Con- 
stitution, while  in  other  cases,  perhaps  the  majority, 
the  suit  must  be  brought  in  a  State  court.  In  other 
cases  a  person  may  have  his  option  of  either  jurisdic- 
tion, as  where  a  citizen  of  Texas  wishes  to  sue  a  citizen 
of  Rhode  Island,  and  the  amount  involved  is  over 
$3000,  then  either  the  Federal  or  State  courts  of  either 
State  are  open  to  the  parties. 


CHAPTER  I 


Contracts-Mutual  Assent 

COMMERCIAL  LAW  is  a  general  term  used  to 
cover  the  legal  rules  which  relate  most  directly 
to  everyday  commercial  transactions.  It  is  a 
term  of  no  exact  boundary,  but  most  commercial  law 
is  based  in  one  way  or  another  on  the  law  of  contracts, 
which  is  one  of  the  largest  subjects  in  the  law.  Bills 
and  notes,  for  instance,  are  special  forms  of  contracts. 
In  order  to  understand  business  law  at  all,  therefore, 
it  is  necessary  at  the  outset  to  have  some  knowledge 
of  the  fundamental  principles  of  the  law  of  contracts. 
DEFINITION  OF  CONTRACTS.— What  is  a 
contract?  Simply  a  promise  or  set  of  promises  which 
the  law  enforces  as  binding.  Any  promise,  if  it  is 
binding,  is  a  contract  or  part  of  a  contract.  So  the 
law  of  contracts  in  their  formation  resolves  itself  into 
this:  What  promises  are  binding?  A  man  may  make 
all  sorts  of  promises,  but  when  has  he  a  right  legally 
to  say  "I  have  changed  my  mind,  I  am  not  going  to 
do  what  I  said  I  would,"  and  when  will  he  be  liable 
in  damages  if  he  fails  to  do  as  he  agreed? 

CONTRACT  TERMS  EXPLAINED.— There 
are  certain  terms  in  contracts  which  the  student  will 
find  repeatedly  mentioned  and  with  which  he  should 
be  familiar  at  the  outset.  For  example,  contracts  are 
spoken  of  as  express  contracts,  and  implied  contracts. 
By  an  express  contract  we  mean  a  contract  the  terms 
of  which  are  fully  set  forth.     Implied  contracts  are 

24 


COMMERCIAL    LAW  25 

contracts  the  terms  of  which  are  not  fully  stated  by 
the  parties.  There  is  a  mutual  agreement  and  prom- 
ise, but  the  agreement  and  promise  have  not  been 
expressly  put  in  words.  If  I  say  to  a  man,  "I  will 
buy  your  horse,  Dobbin,  for  $100"  and  he  replies,  "I 
will  sell  you  the  horse  at  that  price,"  there  is  an  ex- 
press contract.  I  step  into  a  taxi  and  simply  say  to 
the  driver,  "Take  me  to  the  Union  Station."  The 
driver  says  nothing,  but  takes  me  there.  Here  is  an 
implied  contract.  By  my  conduct  I  impliedly  agree 
to  pay  him  the  legal  rate  for  the  distance  carried. 

FORMAL  AND  INFORMAL  CONTRACTS. 
— Contracts  are  sometimes  also  divided  into  formal 
contracts,  and  simple  or  parol  contracts.  There  are 
three  kinds  of  formal  contracts  recognized  in  our  sys- 
tem of  law:  (1)  Promises  under  seal.  (2)  Contracts 
of  record,  such  as  judgments  and  recognizances.  (3) 
Negotiable  instruments.  Of  the  three,  it  may  be  most 
difficult  to  understand  why  a  judgment  is  included  as 
a  form  of  contract,  because  a  judgment  is  simply  a 
judicial  termination  of  a  fact  entered  in  the  office  of 
the  county  clerk,  and  generally  a  lien  on  the  real  prop- 
erty owned  by  the  judgment  debtor.  The  sole  reason, 
apparently,  for  calling  a  judgment  a  contract,  is  that 
an  action  of  debt  may  be  brought  in  a  court  of  law 
upon  such  a  judgment.  Sealed  contracts  and  nego- 
tiable paper  will  be  taken  up  in  a  later  chapter. 
Simple,  or  parol  contracts,  are  those  not  embraced 
in  the  three  previous  classifications  which  constitute 
the  formal  contracts.  The  term  parol  is  a  little  ambig- 
uous, as  it  is  sometimes  used  as  opposed  to  a  written 


26  COMMERCIAL    LAW 

contract,  meaning  simply  an  oral  one,  and  at  other 
times  it  is  used  as  opposed  to  the  three  previous  formal 
contracts. 

UNILATERAL  AND  BILATERAL  CON- 
TRACTS.— Contracts  are  also  divided  into  unilateral 
and  bilateral  contracts.  In  a  unilateral  contract,  the 
contract  imposes  obligations  on  one  party  only.  A 
promissory  note  is  an  example  of  a  unilateral  con- 
tract. In  a  bilateral  contract,  obligation  is  imposed 
on  both  parties.  John  and  Mary  become  engaged  to 
each  other.  This  is  a  bilateral  contract,  and  either 
may  sue  the  other  for  a  breach.  Most  important  re- 
sults flow  from  the  distinction  between  unilateral  and 
bilateral  contracts.    This  vje  shall  consider  later. 

VOID,  VOIDABLE  AND  UNENFORCE- 
ABLE CONTRACTS.— Contracts  are  also  divided  in- 
to void,  voidable  and  unenforceable  contracts.  Strictly 
speaking,  a  void  contract  is  no  contract  at  all.  Some 
statutes  provide  that  no  action  shall  be  brought  on  cer- 
tain contracts,  and  declare  them  absolutely  void.  A 
voidable  contract  is  one  which  is  good  until  the  option 
of  avoiding  it  is  availed  of  by  the  party  who  has  the 
option.  For  example,  an  infant  with  an  income  of 
$2000  a  year  contracts  for  the  delivery  of  a  Packard 
automobile  on  June  1.  The  car,  being  a  luxury,  makes 
the  contract  with  the  infant  voidable  on  his  part,  and 
he  may,  before  June  1,  repudiate  the  contract  and 
not  be  liable  in  a  suit  for  breach  of  contract,  or  he 
may,  if  he  choses,  abide  by  the  contract,  take  the  car, 
and  pay  the  purchase  price  when  it  is  delivered.  An 
unenforceable  contract  is  one  which  in  itself  is  per- 


COMMERCIAL    LAW  27 

fectly  good  as  a  contract,  but  because  of  some  rule 
of  law  cannot  be  enforced.  For  example,  A  agrees, 
orally,  with  the  owner  of  1  Broadway,  to  buy  that 
property  for  $1,000,000.  The  terms  of  the  contract 
are  understood  by  both  parties.  This  contract  is  not 
enforceable,  because,  as  we  shall  see  later,  the  Statute 
of  Frauds  requires  every  contract  for  the  sale  of  real 
property  to  be  in  writing. 

CONTRACTS  UNDER  SEAL.— There  are  two 
ways  of  making  promises  binding,  and  unless  the 
promisor  fulfils  the  requisites  of  one  or  the  other  of 
these  two  ways  his  promise  will  not  be  binding.  The 
first  of  these  ways  relates  to  the  form  in  which  the 
promise  is  made;  the  second  relates  to  the  substance 
of  the  transaction,  irrespective  of  the  form.  The  way 
to  make  a  promise  binding  by  virtue  of  its  form  is  to 
put  it  in  writing  and  attach  a  seal  to  the  writing.  It 
is  often  thought  that  written  promises  are  binding 
in  any  event,  or  that  a  promise  that  is  not  written 
is  not  binding  in  any  event.  Neither  of  these  propo- 
sitions, however,  is  true.  A  promise  is  not  binding 
merely  because  it  is  in  writing;  it  is  necessary  that 
something  more  shall  be  done.  Not  only  must  it  be 
written,  but  a  seal  must  be  attached  in  order  to  make 
the  promise  binding  by  virtue  of  its  form.  Everyone  is 
familiar  with  the  common  ending  in  written  con- 
tracts— "witness  my  hand  and  seal,"  that  is,  my  signa- 
ture and  seal. 

WHAT  IS  A  SEAL?— A  seal  may  be— and  was 
originally — made  with  sealing  wax  stamped  with  a 
crest,  initial  or  what  not.    This  is  still  a  sufficient  seal, 


28  COMMERCIAL    LAW 

but  the  common  kind  of  seal  is  simply  a  wafer  attached 
by  mucilage  to  the  writing.  Another  kind  of  seal,  in 
use  by  corporations  and  notaries  especially,  consists 
simply  of  an  impression  made  on  paper  without  at- 
taching any  foreign  substance  whatever.  Any  of  these 
methods  of  sealing  a  promise  is  good.  In  most  States 
a  written  or  printed  scroll  with  the  letters  "L.  S." 
written  or  printed  within,  or  the  word  "Seal"  written 
or  printed  may  also  be  a  seal  if  so  intended.  It  may 
seem  a  ridiculous  formality  for  the  law  to  attach  im- 
portance to  this  lapping  a  wafer  and  attaching  it  to 
the  end  of  a  writing.  In  a  way  it  is  ridiculous,  but  it 
is  desirable  to  have  some  method  by  which  a  promise 
may  be  made  binding.  One  method,  as  an  original 
question,  may  be  as  good  as  another  so  long  as  it  is 
an  easy  method,  and  attaching  a  seal  is  an  easy 
method,  and  one  which  makes  it  possible  to  make  a 
promise  binding  whenever  you  wish. 

CHANGE  BY  STATUTE  OF  THE  LAW  AS 
TO  SEALED  CONTRACTS,— There  has  been  in 
this  country  a  certain  hostility  to  the  law  of  sealed 
instruments.  It  has  been  thought,  with  reason,  that 
some  of  the  rules  governing  contracts  under  seal  have 
by  their  technicality  promoted  injustice.  This  has 
certainly  been  true  of  an  old  rule  that  contracts  under 
seal  could  not  be  altered  or  discharged  by  any  agree- 
ment not  itself  under  seal.  The  rule,  however,  that  a 
seal  avoids  the  necessity  of  consideration  is  a  desirable 
rule,  since  it  is  important  to  have  some  means  by  which 
those  who  so  intend  may  make  gratuitous  promises 
binding.  It  would  be  better  then  to  abolish  undesirable 


COMMERCIAL   LAW  29 

incidents  of  sealed  contracts  by  statute  rather  than 
to  destroy  totally  the  legal  effect  of  a  seal.  However, 
in  many  States  the  distinction  between  sealed  and 
unsealed  contracts  is  totally  abolished.  In  a  number 
of  other  States  the  common-law  rule  has  been  changed 
by  the  enactment  of  statutory  provisions  to  the  effect^ 
that  sealed  contracts  shall  be  presumed  to  have  been 
made  for  a  sufficient  consideration,  but  this  presump- 
tion is  only  prima  facie,  and  lack  of  consideration  may 
be  affirmatively  proved,  even  in  the  case  of  a  sealed 
instrument.  And  under  such  statutes  unsealed  con- 
tracts remain  as  at  common  law,  i.  e.,  the  burden  of 
proving  consideration  rests  upon  the  plaintiff  who 
seeks  to  enforce  such  a  contract. 

REQUISITES  OF  SIMPLE  CONTRACTS.— 
Sealed  contracts  are  comparatively  easy  to  under- 
stand. Simple  contracts,  which  are  promises  made 
binding  by  virtue  of  their  substance  rather  than  their 
form,  though  called  simple,  are  more  difficult  to  under- 
stand, and  more  complex.  They  are  also  much  more 
common  than  sealed  contracts.  A  simple  contract  is 
a  promise,  or  promises,  to  which  the  parties  have 
assented,  and  for  which  a  price  called  consideration 
has  been  paid.  One  may  promise  as  much  as  he  wishes, 
orally  or  in  writing  so  long  as  he  does  not  attach  a 
seal  to  his  signature,  and  then  say  he  does  not  care  to 
keep  his  promise,  unless  he  has  both  been  paid  for  the 
promise  and  there  has  been  an  assent  by  the  promisor 
and  promisee  to  the  terms  of  the  transaction.  Mutual 
assent  and  consideration  are,  then,  the  requisites  of 
simple  contracts. 


30  COMMERCIAL   LAW 

INTENT  TO  CONTRACT.— In  the  law  of  con- 
tracts,  intention,  as  we  ordinarily  understand  that 
term,  plays  little  part.  In  fact,  the  Supreme  Court 
of  Connecticut,  in  the  case  of  Davidson  vs.  Holden,  55 
Conn.  103,  said:  "It  is  of  no  legal  significance  that  the 
defendants  did  not  intend  to  be  individually  liable,  or 
that  they  did  not  know  or  believe  that  as  a  matter  of 
law  they  would  be." 

It  is  our  overt  acts  that  count  in  contracts.  Or 
shall  we  put  it  this  way :  In  the  eyes  of  the  law  overt 
acts  manifest  legal  intention.  A  says  to  B :  "I  will  sell 
you  my  watch  for  $25,  and  you  may  have  until 
9  o'clock  tomorrow  morning  to  decide."  A  meets  B 
the  next  noon  and  says  to  him:  "I  am  sorry  you  did 
not  take  the  watch.  It  was  a  bargain."  B  replies: 
"Here  is  the  price,  I  will  take  it.  I  intended  to  call 
you  this  morning  but  have  been  so  busy  I  did  not  have 
an  opportunity  to  do  so.  I  told  my  wife  last  night  I 
was  going  to  accept  your  offer  and  I  can  produce  five 
witnesses  who  were  in  the  room  and  heard  me  say 
so."  It  is,  nevertheless,  no  contract,  for,  as  has  been 
said,  quoting  from  an  old  English  case,  "It  is  trite 
learning,  that  the  thought  of  man  is  not  tryable,  for 
the  devil  himself  knows  not  the  thought  of  man." 
Occasionally  there  may  be  the  overt  act  and  still  no 
contract,  although  the  mere  formalities  of  contract 
may  have  taken  place.  The  facts  in  the  case  of  McClurg 
v.  Terry,  21  New  Jersey  Equity  225,  were  as  follows: 
The  plaintiff  was  an  infant  nineteen  years  of  age,  and 
hrd  returned  late  in  the  evening  to  Jersey  City,  from 
an  excursion,  with  the  defendant  and  a  number  of 


COMMERCIAL    LAW  31 

young  friends,  among  whom  was  a  justice  of  the 
peace,  and  all  being  in  good  spirits,  excited  by  the 
excursion,  the  plaintiff  in  jest  challenged  the  defen- 
dant to  be  married  to  her  on  the  spot ;  he  in  the  same 
spirit  accepted  the  challenge,  and  the  justice,  at  their 
request,  performed  the  ceremony,  they  making  the 
proper  responses.  The  ceremony  was  in  the  usual 
and  proper  form,  the  justice  doubting  whether  it  was 
in  earnest  or  not.  The  defendant  escorted  the  plaintiff 
to  her  home,  and  left  her  there  as  usual  on  occasions 
of  such  excursions ;  both  acted  and  treated  the  matter 
as  if  no  ceremony  had  taken  place.  In  deciding  the 
case,  the  court  said :  "In  this  case  the  evidence  is  clear 
that  no  marriage  was  intended  by  either  party;  that 
it  was  a  mere  jest  got  up  in  the  exuberance  of  spirits 
to  amuse  the  company  and  themselves.  If  this  is  so, 
there  was  no  marriage."  The  overt  act  of  the  parties 
manifested  no  legal  intention  to  be  married.  Should 
we  change  the  facts  in  the  following  way,  the  court 
undoubtedly  would  have  held  a  valid  marriage:  If, 
after  the  parties  had  gone  through  the  marriage  cere- 
mony, as  recited,  they  went  on  a  two  weeks'  honey- 
moon, and  on  their  return  lived  together  as  man  and 
wife  for  a  month  and  then  suddenly  decided  to  call 
the  marriage  off,  on  the  ground  that  it  was  a  joke  and 
they  did  not  intend  the  ceremony  to  be  binding,  re- 
gardless of  what  they  said  as  to  the  transaction,  their 
overt  acts  would  be  taken  by  the  court  as  showing 
their  real  legal  intention  at  the  time  the  ceremony 
was  entered  into.  One  more  illustration :  When  leav- 
ing the  class  tonight,  there  is  a  sudden  downpour  of 


32  COMMERCIAL    LAW 

rain,  and  the  instructor  remarks:  "I  will  give  ten 
dollars  for  an  umbrella.'*  A  student  offers  an  um- 
brella and  claims  the  money.  Here  is  an  overt  act,  but 
a  reasonable  person  would  not  take  the  words  used 
literally.  Generally  speaking,  agreements  made  jok- 
ingly and  social  agreements  confer  no  contractual 
rights. 

OFFER  AND  ACCEPTANCE.— The  usual  way 
that  mutual  assent  is  manifested  is  by  an  offer  and 
an  acceptance  of  the  offer.  Two  persons  are  not  likely 
to  express  at  the  identical  minute  the  same  proposi- 
tion. It  is  as  a  practical  matter,  then,  essential  that 
one  should  make  a  proposition,  and  if  a  contract  is  to 
be  made,  that  the  other  should  assent  to  it.  An  offer 
may  be  made  to  one  or  more  specified  persons,  or  to 
anyone  v/homsoever  who  will  do  what  the  offer  re- 
quests, as  in  case  of  an  offer  of  a  reward.  An  offer  is 
itself  a  promise,  but  is  a  promise  conditional  on  the 
payment  of  a  consideration  or  return  for  it  either  by 
some  act  or  some  promise  from  the  other  party. 
According  as  the  offer  asks  for  an  act  or  a  promise  it 
will  fall  into  one  or  the  other  of  the  two  great  divi- 
sions of  simple  contracts ;  one  kind  is  called  unilateral 
(meaning  one-sided),  that  is,  a  promise  only  on  one 
side ;  the  other  is  bilateral,  a  promise  on  each  side. 

ILLUSTRATIONS.— Let  us  give  illustrations 
of  these  contracts.  We  say  to  John :  "We  will  promise 
to  give  you,  John,  $100  if  you  will  do  a  specified  piece 
of  work."  That  is  a  proposal  to  make  an  exchange 
of  the  work  for  the  money  in  a  sense,  but  more  exactly 
it  is  an  offer  to  exchange  an  agreement  to  give  the 


COMMERCIAL    LAW  33 

money  in  return  for  the  v/ork.  We  are  not  saying  to 
John:  "If  you  will  agree  or  promise  to  do  that  work 
we  will  promise  to  give  you  the  money."  We  are 
saying  that  we  will  give  him  the  money  if  he  actually 
does  the  work.  That  offer  requires  the  actual  doing  of 
the  work  before  it  is  binding.  Until  then  the  price 
requested  for  the  promise  has  not  been  paid.  It  is  an 
offer  of  a  unilateral  contract.  Again,  when  we  say  to 
a  man :  "If  you  will  spade  up  our  garden  we  will  pay 
you  $2  a  day,"  we  are  making  an  offer  for  a  unilateral 
contract.  We  are  asking  him  to  spade  up  the  garden ; 
not  to  promise  to  spade  it  up,  but  to  do  it,  and  when 
he  does  it  he  can  hold  us  liable  on  our  promise  to  pay 
him  $2  a  day.  The  promise  will  have  become  binding 
because  we  have  been  given  the  payment  that  we 
asked  for  in  our  promise.  But  if  we  say  to  a  man :  "If 
you  will  agree  to  work  for  us  the  next  month  we  will 
pay  you  $100,"  and  the  man  says,  "All  right,"  then  we 
have  a  bilateral  contract.  We  are  asking  him,  as  the 
price  of  our  promise,  not  to  work  but  to  agree  to 
work,  and  he  has  promised  to  do  so.  To  say  "I  accept" 
is  always  sufficient  acceptance  in  the  case  of  a  bilat- 
eral contract  where  a  promise  is  requested,  but  if  I 
said  to  you,  "I  will  give  you  $5  if  you  will  bring  me 
a  book  here,"  it  would  not  make  a  contract  to  say  "I 
accept."  I  said  I  would  give  you  $5  if  you  brought 
the  book  here,  and  nothing  but  bringing  it  here  will 
form  a  contract.  The  offeree  must  always  do  what 
the  offerer  asks  him.  If  an  offerer  asks  for  a  promise, 
any  form  of  words  indicating  assent  would  be  suffi- 
cient, because  they  would  mean,  in  effect:  "I  consent 


34  COMMERCIAL    LAW 

to  make  the  promise  you  specify  in  your  offer."  The 
form  of  wording  in  simple  contracts  is  immaterial. 
Any  plain  language  is  sufficient  for  an  offer,  and  as 
for  acceptance,  it  does  not  matter  whether  the 
acceptor  says  "all  right,"  or  "I  accept  your  offer,"  or 
in  what  form  he  expresses  his  assent.  The  question 
is,  does  he  express  assent?  Now,  the  offerer  is  at  lib- 
erty to  name  any  consideration  in  his  offer  that  he 
sees  fit.  He  can  name,  in  other  words,  whatever  price 
for  his  promise  he  chooses  to  ask.  If  the  person 
addressed  does  not  choose  to  pay  that  price,  all  he 
has  to  do  is  to  reject  the  offer,  but  he  can  bind  the 
offerer  only  on  the  terms  proposed.  Therefore,  if  the 
offerer  asks  for  an  act  in  return  for  his  promise,  that 
is,  asks  for  an  immediate  payment,  or  work,  or  the 
giving  of  property  for  his  promise,  no  contract  can  be 
made  by  the  person  addressed  saying,  "All  right,  I 
will  do  it;"  that  is  not  giving  the  price  the  offerer 
asked.  On  the  other  hand,  should  the  offerer  ask 
for  a  promise  and  not  for  an  act,  the  acceptor  must 
give  the  promise  asked  for. 

OPTION  WITHOUT  CONSIDERATION.— 
A  common  business  transaction  that  presents  very 
well  the  principles  governing  the  formation  of  simple 
contracts  is  what  is  called  an  option.  Suppose  the 
owner  of  a  mine  says:  "I  will  sell  you  this  mine  for 
$50,000,  and  you  may  have  thirty  days  to  decide 
whether  you  choose  to  accept  the  offer  or  not."  Now, 
it  does  not  matter  whether  that  statement  is  oral  or 
in  writing;  it  is  merely  an  offer,  and  not  binding  as 
the  matter  stands  as  far  as  we  have  stated.  However, 


COMMERCIAL    LAW  35 

if  it  were  in  writing  and  a  seal  attached  (in  a  State 
where  seals  still  have  the  force  which  the  common 
law  gave  them)  it  would  be  a  binding  promise  to  sell 
the  mine  at  that  price  at  any  time  within  thirty  days. 
If  there  is  no  seal  attached,  as  long  as  the  offer  is 
unaccepted  and  unpaid  for,  it  is  not  binding.  The  man 
who  makes  it  may  say:  "I  withdraw  my  offer.  It  is 
true  that  I  promised  to  keep  the  offer  open  thirty  days, 
but  you  did  not  pay  me  for  that  promise  and  I  am 
going  to  break  the  promise.  I  withdraw  my  offer." 
Any  offer  for  the  formation  of  a  simple  contract,  while 
unaccepted,  may  be  withdrawn.  But,  if  before  it  was 
withdrawn  and  within  the  thirty  days'  limit,  the  per- 
son to  whom  the  option  was  given  says,  "Here  is  the 
$50,000  which  you  said  you  would  take  for  your 
mine,"  the  offerer  would  then  be  bound,  and  would 
have  to  perform  his  part  of  the  contract. 

OPTION  WITH  CONSIDERATION.— Let  us 
change  the  character  of  the  option  a  little.  Suppose 
in  consideration  of  $1000  paid  down  the  owner  of  a 
mine  promises  to  sell  the  mine  for  $50,000  at  any  time 
within  thirty  days.  Here  the  offer,  or  the  contract — 
for  it  is  now  more  than  an  offer — has  been  paid  for, 
and  it  is  therefore  binding.  The  person  to  whom  the 
offer  was  made  paid  $1000  for  the  promise,  therefore 
the  promisor  is  bound  to  keep  it.  It  was  not  an  abso- 
lute promise  to  give  the  mine  to  the  buyer,  but  it  was 
a  promise  to  sell  it  to  him  for  $50,000  if  he  chose  to 
take  it  within  thirty  days ;  that  is  a  conditional  prom- 
ise. A  conditional  promise  may  be  binding  and  paid 
for  just  as  well  as  an  absolute  promise. 


36  COMMERCIAL   LAW 

INSURANCE  POLICY.— Take  the  case  of  a 
fire  insurance  policy.  That  is  a  conditional  promise, 
a  promise  to  pay  indemnity  for  the  destruction  of  a 
house  by  fire.  Therefore,  the  performance  of  the 
insurance  company's  promise  is  conditional  on  the 
suffering  by  the  insured  of  loss  by  fire.  An  insurance 
policy  is  ordinarily  a  unilateral  contract;  the  premium 
is  the  consideration  or  price  paid  for  the  promise,  and 
the  promise  is  binding  on  the  insurance  company 
from  the  time  when  the  premium  is  thus  paid.  Of 
course,  the  promise  is  only  binding  according  to  its 
terms.  The  insured  has  bought  a  conditional  promise, 
a  promise  to  pay  if  the  house  burns  down.  He  gets 
that  promise,  but  he  will  not  become  entitled  to  any 
money  or  any  damages  unless  the  house  burns  dov/n 
nor  unless  he  complies  with  the  other  conditions  of 
his  policy. 

GUARANTEE.— Another  kind  of  a  promise 
worth  referring  to  is  a  guarantee.  A  question  arises 
whether  a  business  house  will  sell  something  to  a 
buyer  on  credit,  and  it  decides  it  will  not  without  a 
guarantee.  Accordingly,  John  agrees,  in  writing,  that 
if  the  business  house  in  question  will  sell  James  a  bill 
of  goods,  John  will  guarantee  the  payment  of  the 
price.  That  means,  if  James  does  not  pay  for  the 
goods,  John  will.  That  is  a  unilateral  contract  in 
which  the  promise  is  conditional,  and  the  considera- 
tion for  that  promise  is  the  selling  of  goods  to  James. 
PRELIMINARY  NEGOTIATIONS— ADVER- 
TISEMENTS.—An  offer  is  sometimes  difficult 
to  distinguish  from  other  things.  Suppose  the  case  of 


COMMERCIAL    LAW  37 

an  advertisement.  A  business  house  advertises  that 
it  vi^ill  sell  goods  for  a  certain  price.  Take  the  case  of 
a  bond  list  issued  by  a  banking  house.  The  list  states 
that  the  banking  house  vi^ill  sell  specified  kinds  of 
bonds  at  quoted  prices.  John  receives  one  of  those 
lists,  looks  it  over,  sees  something  that  looks  good  to 
him,  and  goes  into  the  banking  house  and  says:  "I 
will  take  five  of  those  bonds  at  the  price  named  here." 
The  banking  house  says :  "We  have  sold  all  the  bonds 
of  that  kind  that  we  had ;"  or  it  says,  "The  market  has 
changed  on  those  bonds  and  there  has  been  some 
advance  in  the  price."  Has  John  a  cause  of  action 
against  the  banking  house?  He  has  if  that  bond  list 
amounts  to  an  offer — that  is,  if  the  list  means  that 
the  banking  house  offers  to  enter  into  a  contract  with 
anyone  receiving  the  list.  But  it  has  been  held  that 
that  sort  of  advertisement  does  not  prima  facie 
amount  to  an  offer,  although  it  might  be  put  in  such 
clear  words  of  agreement  to  sell  on  the  part  of  the 
banking  house  that  it  would  amount  to  an  offer.  Gen- 
erally an  advertisement  of  this  sort,  or  anything  that 
can  fairly  be  called  an  advertisement  of  goods  for 
sale,  is  held  to  mean  simply  that  the  advertiser  has 
these  goods  for  sale  and  names  a  price  he  is  putting 
upon  them;  he  invites  customers  to  come  in  and  deal 
with  him  in  regard  to  them.  It  is  an  invitation  to 
come  and  make  a  trade  rather  than  a  direct  offer  of 
a  trade. 

ILLUSTRATION.— Again  to  illustrate:  You 
are  looking  at  a  new  model  of  an  automobile  in  a 
show-room  window.     You  like  it,  enter  the  sales- 


no^ana^ 


38  COMMERCIAL   LAW 

room,  and  say  you  will  take  the  car,  tendering  the 
price.  The  manager  tells  you  that  it  is  simply  their 
demonstration  car,  that  he  will  be  glad  to  book  your 
order  for  a  car  of  the  same  model,  and  can- make  deliv- 
ery in  a  month.  You  are  not  satisfied,  and  wish  to 
sue,  claiming  that  your  tender  of  the  price  constituted 
an  acceptance  of  the  dealer's  offer.  Your  position 
would  be  unsound  and  there  would  be  no  recovery 
in  such  a  case  The  placing  of  the  demonstration  car 
in  the  window  is  simply  an  invitation  to  the  public  to 
come  in  and  deal  with  the  seller.  On  the  other  hand, 
suppose  you  go  into  a  second-hand  automobile  sales- 
room. There  are  fifty  cars  of  various  makes  and 
models  on  the  floor  and  each  one  is  labeled  with  a 
different  price.  You  pick  out  a  1918  Packard  which  is 
marked  $1500.  You  tender  the  price  to  the  salesman 
and  say  you  will  take  the  car.  He  refuses  to  sell.  In 
this  case  your  tender  is  an  acceptance  of  his  offer  to 
sell.  In  the  former  instance,  placing  a  price  on  the 
demonstration  car  was  not  a  statement  to  the  public 
generally  that  that  particular  car  was  for  sale  at  that 
price,  but  in  this  case,  where  the  cars  are  all  second- 
hand cars,  the  reasonable  interpretation  of  placing 
the  price  on  the  1918  Packard  is  that  that  particular 
car  is  for  sale.  Quite  likely,  the  dealer  did  not  have 
any  other  Packard  car  in  stock  and  would  have  no 
way  of  securing  any  of  that  model  at  that  price. 

ORAL  AGREEMENT  PRELIMINARY  TO 
WRITTEN  CONTRACT.— Another  case  of  the 
same  nature  that  comes  up  not  infrequently  is  this. 
Parties  talk  over  a  business  arrangement  and  then 


COMMERCIAL    LAW  39 

they  say,  "As  this  is  an  important  matter  let  us  put 
it  down  in  writing;  let  us  have  a  written  contract 
containing  what  has  been  agreed  upon."  When  it 
comes  to  drawing  up  the  contract,  however,  they 
cannot  agree.  One  party  then  says,  "Well,  we  made 
a  definite  oral  agreement  any  way;  let  us  carry  that 
out."  The  other  replies,  "Why,  no,  all  that  was  de- 
pendent on  our  making  a  written  agreement."  The 
settlement  of  their  dispute  depends  on  how  definite 
and  absolute  the  oral  agreement  was.  It  is  possible 
to  make  an  oral  agreement  binding,  although  the 
parties  do  agree  and  do  contemplate  that  it  shall  sub- 
sequently be  reduced  to  writing,  but  generally  the 
inference  is  that  the  oral  agreement  was  merely  a 
preliminary  chaffering  to  fix  the  terms  of  the  writing, 
and  that  everything  is  tentative  until  the  writing  is 
made  and  signed 

AUCTION  SALES.— Another  state  of  affairs 
involving  preliminary  invitations  is  presented  by 
auction  sales.  The  auctioneer  puts  goods  up  for  sale, 
a  bid  is  made,  the  auctioneer  gets  no  other  bid,  and 
then  says,  "I  will  withdraw  this  from  sale."  Is  the 
auctioneer  liable?  Has  he  made  a  contract  to  sell 
that  article  to  the  highest  bidder?  When  the  trans- 
action is  analyzed,  is  this  what  the  auctioneer  says  in 
effect :  "I  offer  to  sell  these  goods  to  the  highest  bid- 
der?" If  this  is  the  correct  interpretation,  then  when 
the  highest  bidder  says,  in  effect,  "I  agree  to  buy 
them,"  there  would  be  a  contract.  On  the  other  hand, 
if  what  the  auctioneer  says  is  in  effect  like  what  the 
advertiser  says:  "Here  are  some  goods  for  sale,  what 


40  COMMERCIAL    LAW 

do  you  bid,  gentlemen,"  then  the  auctioneer  is  not 
making  an  offer  himself.  He  is  inviting  offers  from 
the  people  before  him,  and  until  he  accepts  one  of 
those  offers  from  the  bidders  before  him  there  would 
be  no  contract;  and  until  then  the  auctioneer  could 
vv^ithdraw  the  goods.  And  that  is  the  construction  put 
upon  the  auction  sale — that  the  auctioneer  is  not 
making  an  offer,  but  is  simply  inviting  offers.  Even 
if  the  auctioneer  promises  that  he  v^ill  accept  the 
highest  offer,  that  is,  that  he  will  sell  to  the  highest 
bidder,  his  promise  to  accept  the  highest  bid,  not 
being  paid  for,  would  not  be  binding  upon  him  were 
it  not  for  a  statute  in  some  States  which,  in  the  sale 
of  goods,  would  make  an  auctioneer  bound  to  keep  a 
promise  to  sell  without  reserve,  that  is,  to  the  highest 
bidder,  if  he  made  such  a  promise. 

BIDS  OR  TENDERS.— Somewhat  similar  to 
the  case  of  the  auctioneer  is  the  case  of  tenders  or 
bids  for  the  construction  of  buildings,  or  for  the  sale 
of  goods  to  a  city  or  to  a  corporation.  There,  too,  the 
corporation  or  the  city  is  simply  inviting  offers.  They 
do  not  say,  "We  offer  to  enter  into  a  contract  with 
anyone  who  makes  the  lowest  bid,"  but  rather,  "We 
are  thinking  of  entering  into  a  contract,  and  we  want 
to  receive  offers  in  regard  to  it."  When  the  offers  are 
made  by  the  bids  or  tenders,  any  or  none  of  them  may 
be  accepted,  according  as  the  receiver  thinks  best.  It 
is  sometimes  required  by  law  that  public  corpora- 
tions, like  cities  or  counties,  shall  accept  the  bid  of 
the  lowest  responsible  bidder,  but,  aside  from  such 
statutes,  any  or  none  of  the  bids  may  be  accepted. 


COMMERCIAL    LAW  41 

IMPLIED  CONTRACTS.— An  offer  and  accep- 
tance are  ordinarily  made  by  words  either  spoken  or 
written;  but  any  method  of  communication  which 
would  convey  to  a  reasonable  man  a  clear  meaning 
will  serve  as  well  as  words.  If  A  goes  to  his  grocer 
and  says  "Send  me  a  barrel  of  flour,"  he  has  in  terms 
made  no  promise  to  pay  for  the  flour,  but  the  natural 
meaning  of  his  v/ords  is  that  he  agrees  to  pay.  In  this 
case  A  used  words,  though  not  words  of  promise;  but 
the  same  result  might  follow  where  no  words  at  all 
were  used.  Suppose  A  went  into  a  shop  where  he  was 
known,  picked  up  an  article  from  the  counter,  held  it 
up  so  the  proprietor  could  see  what  he  was  taking, 
and  went  out ;  this  would  be  in  legal  effect  a  promise 
by  A  to  pay  for  the  article.  A  contract,  where  the 
promises  of  the  parties  are  to  be  inferred  not  from 
express  words  of  promise  but  from  conduct  or  from 
language  not  in  terms  promissory,  is  called  an  implied 
promise  or  contract,  as  distinct  from  an  express 
promise  or  contract,  which  is  one  v/here  the  under- 
taking is  in  express  language.  This  difference  between 
express  and  implied  contracts  relates  merely  to  the 
mode  of  proving  them.  There  is  the  same  element 
of  mutual  assent  in  both  cases,  and  the  legal  effect 
of  the  two  kinds  of  obligations  is  identical.  There  is, 
however,  another  kind  of  obligation  which  is  fre- 
quently called  an  implied  contract,  but  sometimes 
called  a  quasi-contract,  because  it  is  not  really  a  con- 
tract at  all,  though  the  obligation  imposed  is  similar. 
If  a  husband  fails  to  support  his  wife,  for  instance, 
she  may  bind  him  by  purchases  of  goods  necessary 


42  COMMERCIAL    LAW 

for  her  support.  She  may  do  this  even  though  he 
directly  forbids  the  sales  to  her.  There  is  obviously 
no  mutual  assent  in  this  case;  the  husband  emphat- 
ically dissents  and  expresses  his  dissent,  but  he  is 
bound  just  as  if  he  had  contracted. 

TERMINATION  OF  OFFER  BY  REVOCA- 
TION OR  REJECTION.— Since  offers  do  not  be- 
come binding  until  accepted  according  to  their  terms, 
up  to  that  time  they  may  be  terminated  v^ithout  lia- 
bility. This  may  happen  in  several  ways.  In  the  first 
place  an  offer  may  be  revoked  by  the  offerer.  To 
effect  a  revocation  he  must  actually  notify  the  other 
party  of  his  change  of  mind,  before  the  latter  has 
accepted.  We  have  already  stated  that  offers  may  be 
rejected  by  the  person  to  whom  they  are  made.  For 
instance,  we  say,  "We  offer  you  one  hundred  shares 
of  stock  at  a  certain  price,  and  you  may  have  a  week 
to  think  it  over."  You  say,  *T  do  not  care  for  that 
offer,  I  reject  it."  You  come  around  the  next  day  and 
say,  "On  reflection  I  have  concluded  to  accept  that 
offer."  The  acceptance  is  within  the  seven  days  which 
we  originally  said  might  be  used  for  reflection,  but 
the  offer  has  been  terminated  by  the  rejection.  There 
is  no  longer  any  offer  open,  and  consequently  the 
acceptance  amounts  to  nothing.  A  troublesome  ques- 
tion in  regard  to  the  revocation  of  an  offer  for  a  uni- 
lateral contract  is  this:  Suppose  A  offers  B  $5  for  a 
book  and  B  starts  to  get  it  but  when  he  reaches  the 
door,  then  A  refuses  to  take  the  book.  The  general 
disposition  is  to  try  to  hold  that  promise  binding,  and 
yet  the  difficulty  is  that  the  offeree  has  not  fully  done 


COMMERCIAL    LAW  43 

what  he  was  asked  to  do,  and  if  he  chose  to  turn  back 
and  take  the  book  away  he  could  do  so  without  lia- 
bility. He  could  say,  "I  did  not  promise  to  bring  the 
book.  I  brought  it  part  way,  the  walk  was  long  and 
I  am  going  to  take  it  back."  If  he  is  thus  free  to  with- 
draw it  seems  impossible  to  deny  that  the  other  party 
is  equally  free.  Bilateral  contracts  are  more  desirable 
than  unilateral  because  in  bilateral  contracts  the 
mutual  promises  bind  the  parties  before  they  begin 
to  perform  and  both  parties  are  therefore  protected 
while  they  are  performing.  In  unilateral  contracts, 
the  contract  is  not  completed  until  the  act  requested 
is  fully  done.  Until  then,  therefore,  either  party  may 
withdraw. 

A  COUNTER  OFFER  IS  A  REJECTION.— 
Another  way  in  which  offers  may  be  terminated  is 
by  a  counter  offer  on  the  part  of  the  person  to  whom 
the  offer  was  made.  We  say,  "We  will  sell  you  stock 
for  $100  a  share,  and  you  may  have  a  week  to  think  it 
over."  You  say,  "I  will  give  you  $99  a  share."  We 
say,  "No,  we  will  not  take  it."  You  say,  "Well,  I  will 
give  you  $100."  You  are  too  late;  you  rejected  our 
offer  of  sale  at  $100  by  saying  you  would  give  us  $99. 
The  minute  you  say  you  will  give  us  $99,  our  offer  is 
rejected.  Of  course,  when  you  make  the  counter  offer 
of  $99,  if  we  say  we  will  accept  your  offer  to  buy,  that 
would  make  a  contract.  Offers  are  constantly  rejected 
by  counter  offers  by  people  who  really  intend  to  enter 
into  a  contract.  Suppose  A  says,  "I  will  lease  you  my 
house  a  year  for  $800."  You  say,  "All  right,  I  will 
take  it  if  you  paper  the  dining-room."    That  rejects 


44  COMMERCIAL    LAW 

the  offer.  A  new  offer  has  been  made  by  the  person 
addressed,  who  offers,  if  the  dining-room  is  papered, 
to  take  the  house  at  $800. 

TERMINATION  OF  OFFER  BY  DEATH 
OR  INSANITY. — An  offer  is  also  terminated  by  the 
death  or  insanity  of  either  party  before  acceptance. 
After  a  contract  has  once  been  formed  neither  subse- 
quent death  nor  insanity  terminates  liability  upon  it 
unless  the  contract  is  of  such  a  personal  character 
that  only  performance  by  the  contractor  in  person 
will  fulfil  it. 

ILLUSTRATION.— In  Beach  v.  First  Metho- 
dist Episcopal  Church,  96  111.  177,  a  fund  was  being 
raised  to  build  a  new  church,  and  a  subscription  paper, 
as  follows,  was  signed  by  Lorenzo  Beach : 

"Fairbury,  Feb.  14,  1874. 

"We,  the  undersigned,  agree  to  pay  the  sum  set 
opposite  our  respective  names,  for  the  purpose  of 
erecting  a  new  M.  E.  church  in  this  place,  said  sums 
to  be  paid  as  follows :  One-third  to  be  paid  when  con- 
tract is  let,  one-third  when  building  is  enclosed,  one- 
third  when  building  is  completed.  Probable  cost  of 
said  church  from  ten  thousand  dollars  ($10,000)  to 
twelve  thousand  dollars  ($12,000)." 

Mr.  Beach  attached  and  subscribed  to  that  paper 
the  following: 

"Fairbury,  1874. 

"Dr.  Beach  gives  this  subscription  on  the  condi- 
tion that  the  remainder  of  eight  thousand  dollars  is 
subscribed. 

"Lorenzo  Beach,  $2000." 


COMMERCIAL    LAW  45 

In  April,  1875,  Dr.  Beach  v/as  adjudged  insane 
by  the  county  court.  The  court  held  that  the  "sub- 
scription made  by  Dr.  Beach  was,  in  its  nature,  a  mere 
offer  to  pay  that  amount  of  money  to  the  church  upon 
the  condition  therein  expressed.  There  is  nothing  in 
the  record  tending  to  show  that  the  church,  in  this 
case,  took  any  action  upon  the  faith  of  this  subscrip- 
tion, until  after  Dr.  Beach  was  adjudged  insane,  or 
that  the  church  paid  money  or  incurred  any  liability. 
His  insanity,  by  operation  of  law,  was  a  revocation 
of  the  offer."  Suppose  a  letter  for  a  v/inter's  supply 
of  coal  is  sent  to  your  coal  dealer  and  is  acknowledged 
by  him,  delivery  to  be  made  before  October  1.  On 
September  15,  the  coal  dealer  dies,  and  his  estate 
refuses  to  fulfill  the  contract.  In  such  a  case,  if  you 
were  compelled  to  buy  coal  at  a  higher  price  from 
another  dealer,  you  would  have  a  cause  of  action 
against  the  estate  for  the  damage  you  suffer.  The 
coal  dealer's  executor  or  administrator  could  very 
easily  carry  out  a  contract  of  this  character.  On  the 
other  hand,  suppose  you  are  running  a  series  of  lec- 
tures during  the  winter,  and  you  have  engaged  a 
noted  lecturer  to  deliver  six  lectures.  After  he  has 
delivered  three,  he  dies.  In  this  case,  death  would  ter- 
minate the  contract,  as  this  is  clearly  a  contract  for 
personal  services  and  the  executor  or  administrator 
of  the  deceased  lecturer  could  not  perform  the  con- 
tract for  him,  as  could  be  done  in  the  case  of  the  coal 
dealer. 

TERMINATION  OF  OFFER  BY  LAPSE  OF 
TIME. — An  offer  may  be  terminated  by  delay  on  the 


46  COMMERCIAL    LAW 

part  of  the  person  addressed.  An  answer  to  an  offer 
must  be  sent  in  time,  whether  mail  or  telegraph  is 
used,  or  whether  the  parties  are  dealing  face  to  face. 
An  offer  lapses  if  it  is  not  accepted  within  the  time 
the  offer  specifies  if  any  time  is  specified.  If  no  time 
is  specified,  then  within  a  reasonable  time.  One  may 
specify  any  length  of  time  in  his  offer,  and  it  will 
remain  open  for  that  time  provided  it  is  not  rejected 
or  revoked,  and  neither  party  dies  or  becomes  insane, 
in  the  meantime.  But  frequently  offers  contain  no 
express  limit  of  time;  then  it  is  a  question  of  what  is 
a  reasonable  time,  and  reasonableness  depends  upon 
business  customs,  the  character  of  the  transaction, 
the  way  the  offer  is  communicated,  and  similar  cir- 
cumstances. An  offer  on  the  floor  of  a  stock  exchange 
will  not  last  very  long.  A  reasonable  time  for  accep- 
tance of  such  an  offer  is  immediately,  and  an  offer 
sent  by  telegraph  will  not  remain  in  force  long.  The 
use  of  the  telegraph  indicates  that  the  offerer  deems 
haste  of  importance.  An  offer  sent  by  mail  will  last 
longer.  An  offer  relating  to  things  which  change  in 
value  rapidly  will  not  remain  open  for  so  long  a  time 
as  an  offer  which  relates  to  land,  or  something  that 
does  not  change  in  value  rapidly. 

ILLUSTRATION.— In  the  case  of  Loring  v. 
the  City  of  Boston,  7  Met.  (Mass.)  409,  the  facts  were 
that  on  May  26,  1837,  this  advertisement  was  pub- 
lished in  the  daily  papers  of  Boston:  "$500  reward. 
The  above  reward  is  offered  for  the  apprehension  and 
conviction  of  any  person  who  shall  set  fire  to  any 
building  within  the  limits  of  the  city.  May  26th,  1837. 


COMMERCIAL    LAW  47 

Samuel  A.  Eliot,  Mayor."  In  January,  1841,  there 
was  an  extensive  fire  on  Washington  Street,  and  Lor- 
ing,  after  considerable  effort,  was  able  to  secure  the 
apprehension  and  conviction  of  the  criminal.  He 
then  sued  to  recover  the  reward,  which  the  city  of 
Boston  refused  to  pay.  The  ground  of  defense  was 
that  the  advertisement  "offering  the  reward  of  $500 
for  the  apprehension  and  conviction  of  persons  set- 
ting fire  to  buildings  in  the  city,  was  issued  almost 
four  years  before  the  time  at  which  the  plaintiff  ar- 
rested Marriott  and  prosecuted  him  to  conviction." 
The  opinion  of  the  court  reads :  "three  years  and  eight 
months  is  not  a  reasonable  time  within  which,  or 
rather  to  the  extent  of  which,  the  offer  in  question 
can  be  considered  as  a  continuing  offer  on  the  part  of 
the  city.  In  that  length  of  time,  the  exigency  under 
which  it  was  made  having  passed,  it  must  be  pre- 
sumed to  have  been  forgotten  by  most  of  the  officers 
and  citizens  of  the  community,  and  cannot  be  pre- 
sumed to  have  been  before  the  public  as  an  actuating 
motive  to  vigilance  and  exertion  on  this  subject ;  nor 
could  it  justly  and  reasonably  have  been  so  under- 
stood by  the  plaintiff.  We  are,  therefore,  of  the 
opinion  that  the  offer  of  the  city  had  ceased  before 
the  plaintiff  accepted  and  acted  upon  it  as  such,  and 
that  consequently  no  contract  existed  upon  which 
this  action,  founded  on  an  alleged  express  promise, 
can  be  maintained." 

BOTH  PARTIES  MUST  BE  BOUND  OR 
NEITHER. — Both  parties  to  a  simple  contract  must 
in  effect  be  bound,  and  until  they  are,  there  is  no 


48  COMMERCIAL    LAW 

contract.  In  a  unilateral  contract,  before  the  prom- 
ise becomes  binding,  the  promisee  must  have  actually 
performed  what  he  was  requested  to  do,  that  is,  he 
must  bind  himself  by  actual  performance  before  the 
offerer's  promise  is  binding  on  him.  In  a  bilateral  con- 
tract, where  each  party  makes  a  promise,  neither 
promise  can  be  binding  unless  and  until  the  other  one 
is.  So  that  in  the  case  of  the  proposed  agreement  to 
lease,  as  the  proposed  tenant  might  refuse  to  take  the 
house  if  the  dining-room  was  not  papered,  the  pro- 
posed landlord  has  a  similar  right;  that  is,  since  one 
is  not  bound,  the  other  is  not. 

CONTRACTS  BY  CORRESPONDENCE.— 
Contracts  are  often  made  by  correspondence,  simple 
contracts  especially.  That  raises  rather  an  impor- 
tant question  as  to  how  and  when  the  contract  is 
formed.  Suppose  a  letter  containing  an  offer  is  ad- 
dressed from  Boston  to  a  man  in  New  York.  A  reply 
is  sent  by  him  from  New  York  accepting  the  offer. 
That  reply  goes  astray.  Is  there  a  contract?  Yes. 
It  creates  a  contract  by  correspondence  for  a  letter 
to  be  mailed  by  the  acceptor  provided  the  offerer  im- 
poses no  conditions  to  the  contrary,  and  impliedly 
authorizes  the  use  of  the  mails,  as  he  does  by  him- 
self making  an  offer  by  mail.  But  suppose  the  offerer 
in  his  letter  says,  "If  I  hear  from  you  by  next  Wed- 
nesday I  shall  consider  this  a  contract."  Then,  unless 
the  offerer  receives  an  ansvv^er  by  the  next  Wednes- 
day, there  will  be  no  contract.  It  will  make  no  differ- 
ence that  an  answer  has  been  mailed,  it  must  have 
been  received;  that  is  a  condition  of  the  offer.    Sup- 


COMMERCIAL   LAW  49 

pose  an  offer  is  made  by  word  of  mouth,  and  it  is 
accepted  by  sending  a  letter.  Does  the  contract  then 
become  binding,  irrespective  of  receipt  of  the  letter? 
No,  unless  in  some  way  the  offerer  has  authorized  the 
use  of  the  mails  in  sending  such  an  answer,  and  if  the 
circumstances  were  such  that  the  use  of  the  mails 
would  be  customary,  that  would  amount  to  an  im- 
plied authorization.  The  use  of  the  telegraph  de- 
pends upon  similar  principles.  If  an  offer  is  sent  by 
telegraph,  an  answer  may  be  sent  by  telegraph,  and 
an  acceptance  started  on  its  way  will  become  binding 
although  it  is  never  received.  Similarly,  one  may 
authorize  a  telegraphic  answer  to  a  letter  containing 
an  offer  sent  by  mail,  and  if  the  use  of  the  telegraph  is 
authorized,  a  contract  will  arise  at  the  moment  that 
the  telegram  is  sent. 

ILLUSTRATIONS.— In  the  case  of  an  option, 
if  the  acceptance  was  made  by  mail  and  lost  in  the 
mails,  a  binding  contract  would  be  formed  if  the  use 
of  the  mail  was  expressly  or  impliedly  authorized, 
and  similarly  if  the  option  called  for  payment  and  a 
letter  was  mailed  containing  a  draft  or  cash.  There 
is  a  right  to  send  a  check  or  draft  by  mail  if  the  par- 
ties had  been  dealing  by  mail.  That  authority  would 
be  implied.  When  parties  are  dealing  by  mail  and 
there  is  a  bargain  that  a  check  shall  be  sent,  the  check 
becomes  the  property  of  the  person  to  whom  it  is 
sent  as  soon  as  it  is  mailed,  and,  therefore,  when  the 
letter  with  the  check  is  put  in  the  mail  it  operates 
as  a  payment  on  the  option,  and  the  loss  of  the  draft 
is  not  the  sender's  loss,  but  the  other  man's.    A  lost 


50  COMMERCIAL    LAW 

draft,  however,  can  be  replaced  and  must  be  replaced. 
Authority  to  send  actual  cash  by  mail  would  not  be 
so  easily  implied,  especially  if  the  amount  were  large, 
because  it  is  contrary  to  good  business  custom;  but  if 
authority  were  given,  the  result  would  be  the  same 
as  in  the  case  of  a  check.  It  would,  however,  be  a  prop- 
er business  precaution  to  register  the  letter  if  it  con- 
tained cash.  If  the  offerer,  not  having  received  the 
letter  of  acceptance  and  thinking  none  had  been  sent, 
sells  the  property  to  another  person,  though  not  mor- 
ally blamable,  he  would  get  into  trouble.  The  second 
purchaser  v/ould  get  title  to  the  property,  supposing 
that  the  property  was  actually  transferred  to  him. 
The  lost  letter  created  a  contract,  but  it  did  not  ac- 
tually transfer  title  to  the  property,  and,  therefore, 
when  the  purchaser  actually  got  possession  of  the 
property  he  would  become  the  owner  of  it  and  could 
not  be  deprived  of  his  title  if  he  took  it  innocently. 
If,  however,  the  person  to  whom  the  property  was 
transferred  had  notice  of  the  prior  completion  of  a 
contract,  he  could  not  keep  the  property.  In  any 
event  the  seller  would  be  liable  in  damages  for  breach 
of  the  contract  completed  by  mailing  the  lost  letter. 
Suppose  an  option  is  given  by  telephone  to  one  who, 
just  before  the  option  expires,  tries  to  get  a  connection 
by  phone  to  accept  and  is  unable  to  do  so,  and  ten 
minutes  after  the  time  has  expired  a  connection  is 
secured?  There  is  no  contract  and  he  has  no  action. 
It  is  no  fault  of  the  offerer  that  the  acceptor  was 
unable  to  accept  in  time,  and,  generally  speaking, 
one  who  wishes  to  accept  an  offer  must  at  his  peril 


COMMERCIAL    LAV/  51 

keep  the  means  of  acceptance  open.  It  may  be  asked 
why  does  not  the  same  principle  apply  in  regard  to 
mail  as  to  the  telephone ;  that  is,  why  does  not  start- 
ing the  acceptance  by  telephone  complete  the  con- 
tract? Because  there  is  no  authority  to  send  com- 
munication by  telephone  to  the  offerer  when  the  ac- 
ceptor has  no  telephone  connection.  When  one 
sends  an  offer  by  mail  the  reason  that  he  is  bound  by 
an  acceptance  sent  by  mail  is  because  he,  in  effect, 
asks  that  an  acceptance  properly  addressed  to  him  be 
started  on  its  course.  He  takes  his  chance  as  to  the 
rest,  but  an  offerer  by  telephone  does  not  authorize 
a  reply  by  talking  into  the  telephone  when  there  is  no 
connection. 

MISTAKES  IN  THE  USE  OF  LANGUAGE 
IN  OFFER  AND  ACCEPTANCE.— Another  ques- 
tion which  has  to  do  with  the  express  mutual  assent 
of  parties  relates  to  the  meaning  of  language  used. 
Suppose  an  offerer  says,  "I  will  sell  you  a  cargo  of 
goods  from  the  ship  'Peerless,'  due  to  arrive  from 
India,  at  a  certain  price."  The  buyer  assents.  There 
are  two  ships  named  "Peerless,"  and  the  buyer  thinks 
one  is  meant,  but  the  seller  thinks  the  other  is  meant. 
Is  there  a  contract  for  the  sale  of  the  cargo  of  "Peer- 
less" No.  1,  or  a  contract  for  the  sale  of  the  cargo  of 
No.  2,  or  no  contract  at  all?  The  answer  is,  that 
language  bears  the  meaning  which  a  reasonable  per- 
son in  the  position  of  the  person  to  whom  the  offer 
is  made  is  justified  in  attaching  to  it.  If  a  reason- 
able person  in  his  position  would  think  "Peerless"  No. 
1  was  meant,  then  there  is  a  contract  for  the  cargo  of 


52  COMMERCIAL    LAW 

No.  1.  If  he  was  not  justified  in  thinking  that,  and 
ought  to  have  thought  No.  2  was  meant,  although  in 
fact  he  did  not  think  so,  there  was  a  contract  for  the 
cargo  of  "Peerless"  No.  2.  If  either  meaning  were  as 
reasonable  as  the  other,  then  each  party  has  a  right 
to  insist  on  his  own  meaning,  and  there  would  be  no 
contract.  This  principle  often  comes  up  in  contracts 
made  by  telegraph,  where  the  words  of  the  telegram 
are,  by  the  mistake  of  the  telegraph  company, 
changed.  For  instance,  a  telegram  purports  to  be  an 
offer  to  sell  a  large  quantity  of  laths  at  $1  a  bundle. 
The  terms  as  actually  despatched  by  the  seller  in 
making  his  offer  fixed  the  price  at  $1.20.  The  tele- 
graph company  dropped  off  the  words  "and  twenty 
cents."  A  telegram  is  sent  back  by  the  buyer,  "I  ac- 
cept your  telegraphic  offer."  Then  trouble  arises 
when  buyer  and  seller  compare  notes.  Well,  the  of- 
ferer is  bound.  He  selected  the  telegraph  as  the 
means  of  communication,  and  he  must  take  the  con- 
sequences of  a  misunderstanding,  which  arose  from  a 
mistake  of  the  agency  which  the  offerer  himself 
selected.  The  question  may  be  asked:  Would  there 
be  any  right  of  action  against  the  telegraph  company 
by  the  offerer,  the  sender  of  the  telegram?  The  an- 
swer is  yes.  The  company  has  broken  the  contract  it 
impliedly  made  with  the  sender  to  use  reasonable 
diligence  in  despatching  and  delivering  the  message. 
But  the  trouble  with  that  action  is  that  on  telegraph 
blanks  there  is  always  this  in  substance:  that  on  un- 
repeated  telegrams  this  company  is  liable  for  mis- 
takes only  to  an  amount  not  exceeding  twice  the 


COMMERCIAL    LAW  53 

cost  of  the  telegram;  and  it  has  been  held  in  many 
States  that  that  limit  on  unrepeated  telegrams  is  not 
unreasonable.  The  sender  of  the  telegram  has  agreed 
to  the  contract  on  the  reverse  side  of  the  telegraph 
blank,  and  he  ought  to  have  his  message  repeated  if  he 
desires  to  hold  the  company  liable  in  full  damages  if 
his  message  does  not  reach  the  party  addressed  in 
absolutely  correct  form.  In  other  States,  however, 
this  limitation  of  liability  is  held  to  be  against  public 
policy  and  the  company  is  liable  for  the  full  damage 
suffered. 

CONDITION  IN  OFFER  REQUIRING  RE- 
CEIPT OF  ACCEPTANCE.— An  offerer,  as  has 
been  said,  may  insert  in  his  offer  any  condition  he  sees 
fit.  He  may  therefore  insert  a  condition  that  an  ac- 
ceptance shall  reach  him,  not  merely  be  despatched. 
The  condition  may  specify  the  time  within  which  the 
acceptance  must  arrive  in  order  to  be  effectual.  It  is 
a  wise  precaution  in  all  business  offers  of  importance 
to  insert  such  a  condition  in  the  offer.  It  will  not 
be  sufficient  to  add  to  the  offer  such  words  as  "sub- 
ject to  prompt  acceptance,"  for  prompt  acceptance 
would  be  given,  within  the  meaning  of  the  law,  by 
despatching  the  acceptance,  not  by  the  receipt  of  it. 
The  condition  should  be  in  such  words  as  "subject  to 
prompt  receipt  of  your  acceptance,"  or  "subject  to 
receipt  of  your  acceptance,"  by  a  stated  day  or  hour. 

WHEN  SILENCE  GIVES  CONSENT.— 
There  is  one  way  of  manifesting  mutual  assent, 
namely,  by  silence,  of  which  a  word  should  be  said. 
There  is  a  proverb  that  "Silence  gives  consent."    Is 


54  COMMERCIAL    LAW 

it  so  in  law?  Suppose  a  man  goes  into  an  insurance 
broker's  and  tosses  some  policies  down  and  says, 
"Renew  those  policies,  please.'*  Nobody  says  any- 
thing and  he  leaves  the  policies  there  and  goes  out. 
The  next  night  his  buildings  burn  down.  Are  they 
insured?  They  are,  in  effect,  if  the  insurance  broker 
has  contracted  to  renew  the  policies;  otherwise  the 
buildings  are  not  insured.  Now  on  the  bare  facts,  as 
we  have  stated  them,  they  are  not  insured;  some 
other  facts  must  always  exist  to  make  silence  amount 
to  assent.  If,  for  instance,  on  previous  occasions,  the 
broker  kept  silence  when  such  statements  were  made 
to  him,  and  nevertheless  carried  out  the  proposal,  it 
is  a  fair  inference  that  he  means  by  his  silence  this 
time  what  he  meant  the  preceding  time.  Further- 
more, silence,  when  the  offer  is  unknown,  can  never 
amount  to  assent.  In  the  case  as  we  have  put  it,  we 
did  not  say  that  the  insurance  broker  even  heard  the 
offer;  if  he  did,  then  the  question  would  depend  on 
whether  he  had  ever  done  anything  to  justify  the 
other  person  in  believing  that  silence  would  mean  as- 
sent in  such  a  dealing,  or  whether  business  customs 
justified  the  assumption.  The  offerer  cannot  by  his 
own  act  m.ake  the  silence  of  the  other  person  amount 
to  an  acceptance.  Suppose  an  offer  of  this  sort:  "We 
offer  to  sell  you  100  shares  of  stock  at  $50  a  share, 
and  unless  we  hear  from  you  to  the  contrary  by  next 
Wednesday  we  shall  conclude  that  you  have  accepted 
our  offer."  The  offerer  does  not  get  any  word  before 
next  Wednesday.  Nevertheless,  there  is  no  contract. 
The  person  addressed  has  a  right  to  say,  "Confound 


COMMERCIAL    LAW  55 

his  impudence,  I  am  not  going  to  waste  a  postage 
stc  mp  on  him,  but  I  don't  accept  his  offer.  He  has  no 
business  to  suppose  that  if  he  doesn't  hear  from  me  to 
the  contrary  I  assent."  This  sort  of  case  is  not  in- 
frequently referred  to:  A  magazine  is  sent  through 
the  mails  on  a  subscription  for  a  year,  the  subscrip- 
tion runs  out,  the  magazine  is,  nevertheless,  still  sent. 
Is  the  person  who  receives  it  bound  to  pay  another 
year's  subscription?  Here  you  have  a  little  more 
than  silence;  you  have  the  receiver  of  the  magazine 
continuing  to  receive  it.  If  he  refused  to  receive  it, 
undoubtedly  there  would  be  no  contract,  but  v/here 
a  man  takes  property  which  is  offered  to  him,  he  is 
bound  by  the  proposal  which  was  made  to  him  in 
regard  to  the  property.  He  ought  to  let  the  magazine 
alone  if  he  doesn't  want  to  pay  for  it.  You  may  say 
that  the  receiver  does  not  know  that  the  subscription 
has  run  out,  and  if  he  did  he  would  not  take  the 
magazine.  But  then  he  ought  to  know.  He  made  the 
subscription  originally.  The  difficulty  is  merely  in 
his  own  forgetfulness,  and  he  cannot  rely  on  that. 

ILLUSTRATION.— The  leading  case  of  Hobbs 
V.  Massasoit  Whip  Co.,  158  Mass.  194,  is  a  good  il- 
lustration. The  plaintiff  in  this  case  had  been  in  the 
habit  of  sending  eel  skins  to  the  defendant  and  had 
received  pay  from  him  in  due  course.  The  skins  in 
the  shipment  for  payment  of  which  suit  was  brought, 
were  alleged  by  the  defendant  to  be  short  of  the  re- 
quired length,  and  in  a  condition  unfit  for  use.  They 
were  kept  by  the  defendant  some  months,  and  were 
then  destroyed,  without  notification  to  the  plaintiff. 


56  COMMERCIAL    LAW 

The  latter  sued  for  the  price  of  the  skins  and  the  court 
held  that  the  silence  of  the  defendant  and  failure  to 
notify  the  plaintiff  that  it  did  not  wish  to  have  this 
particular  lot  of  skins,  amounted  to  an  acceptance. 
The  court  said:  "In  such  a  condition  of  things,  the 
plaintiff  was  warranted  in  sending  the  defendant 
skins  conforming  to  the  requirements,  and  even  if  the 
offer  was  not  such  that  the  contract  was  made  as  soon 
as  the  skins  corresponding  to  its  terms  were  sent, 
sending  them  would  impose  on  the  defendant  a  duty 
to  act  at  that  time;  and  silence  on  its  part,  coupled 
with  a  retention  of  the  skins  for  an  unreasonable 
time,  might  be  found  by  the  jury  to  warrant  the  plain- 
tiff in  assuming  that  they  were  accepted,  and  thus 
to  amount  to  an  acceptance." 


CHAPTER  II 


Contracts-Consideration  and 
Enforceability 

CONSIDERATION  MAY  BE  ANOTHER 
PROMISE  OR  AN  ACT.— The  second  great 
requisite  in  the  formation  of  simple  contracts  is 
consideration.  A  price  must  be  paid  for  a  promise  in 
order  to  make  it  binding.  The  price  paid  may  be  an- 
other promise,  in  which  case  the  contract  is  bilateral, 
or  the  price  paid  may  be  some  act  actually  done  or  per- 
formed, in  which  case  the  contract  is  unilateral. 

ADEQUACY  OF  CONSIDERATION  IM- 
MATERIAL.— Not  any  act,  or  the  promise  of  any 
act,  is  sufficient  consideration,  as  will  be  seen.  Nev- 
ertheless, in  general  the  law  does  not  attempt  to 
gauge  the  adequacy  of  the  consideration;  that  is, 
parties  may  make  such  bargains  as  they  wish  as  far 
as  the  price  is  concerned.  A  may  say  that  he  will 
sell  his  horse,  which  is  worth  $300,  for  $100,  or  for  a 
promise  to  pay  $100.  That  will  be  a  perfectly  good 
contract,  if  accepted,  in  spite  of  the  fact  that  the 
promised  horse  is  worth  more  than  the  promised 
price.  Such  difference  in  the  value  of  the  promise 
and  the  value  of  the  price  may  go  to  a  great  extreme. 
The  horse  may  be  a  thousand-dollar  animal,  and  the 
price  promised  only  $100,  but  when  you  wish  to  push 
the  case  to  an  extreme  you  are  likely  to  get  into  this 
difficulty:  Did  the  parties  really  mean  to  make  a  bar- 

57 


58  COMMERCIAL   LAW 

gain?  If  what  they  were  doing  was  arranging  for 
a  gift  of  the  horse  and  putting  up  some  little  alleged 
consideration  as  a  blind,  that  will  not  do;  but  any  ex- 
change the  parties  really  in  good  faith  bargain  for, 
with  certain  exceptions  hereafter  stated,  is  sufficient. 
A  SMALLER  SUM  OF  MONEY  IS  NOT 
SUFFICIENT  CONSIDERATION  FOR  THE 
PROMISE  SIMULTANEOUSLY  TO  PAY  OR 
DISCHARGE  A  LARGER  LIQUIDATED  SUM. 
— This  is  the  principal  exception,  that  in  contracts 
or  promises  relating  to  a  fixed  sum  of  money,  the 
consideration  cannot  be  the  simultaneous  payment 
or  discharge  of  a  smaller  sum  of  money  on  the  other 
side.  If  A  promises  B  $100,  it  will  not  be  good  con- 
sideration for  B  to  promise  in  exchange  $50,  or  even 
$99.99,  payable  at  the  same  time  and  place.  In 
other  words,  the  law  does  require  adequacy  in  ex- 
changes or  agreements  to  exchange  money.  A 
owes  B  $100  and  says  to  him,  "I  can't  pay  it  all,"  or 
"I  don't  want  to  pay  it  all.  Will  you  let  me  off  for 
$50?"  B  replies,  "Yes,  I  will  take  $50."  That 
agreement  is  not  binding,  and  even  if  the  $50  is  ac- 
tually paid,  B  may  afterwards  come  and  say,  "You 
paid  me  only  part  of  the  debt  you  owed  me.  It  is 
true  I  said  I  would  call  the  whole  thing  square,  but 
there  was  no  consideration  sufficient  in  law  for  my 
promise,  since  you  paid  me  only  part  of  what  you 
were  bound  to."  This  rule  of  common  law,  though  gen- 
erally well  established,  does  not  exist  or  is  much  quali- 
fied in  a  few  States,  such  as:  Georgia,  Maine,  Mis- 
sissippi, New  Hampshire,  North  Carolina,  Virginia. 


COMMERCIAL    LAW  59 

UNLIQUIDATED  CLAIMS  MAY  BE  DIS- 
CHARGED BY  ANY  AGREED  SUM.— The  case 
cited  in  the  preceding  paragraph  must  be  distinguished 
from  another.  Suppose  A  owes  B  some  money  for 
services,  the  price  of  which  was  never  exactly  fixed, 
but  which  B  says  are  of  the  value  of  $100.  Then  if  B 
agrees  to  take  $50  in  satisfaction  of  his  claim  against 
A,  B  is  bound ;  the  transaction  is  effectual.  The  dif- 
ference is  between  what  is  called  a  liquidated  and  an 
unliquidated  claim. 

DEFINITION  OF  LIQUIDATED  CLAIM. 
— A  liquidated  claim  is  one  of  an  exact  amount  def- 
initely fixed.  Such  a  claim,  as  has  been  said,  cannot 
be  satisfied  by  partial  payment  or  promise  of  partial 
payment.  But  an  unliquidated  or  a  disputed  claim — a 
claim  subject  to  a  real  bona  fide  dispute,  not  merely  a 
dispute  trumped  up  for  the  purpose  of  disputing  a  good 
claim — may  be  discharged  by  any  payment  on  which 
the  parties  agree.  The  law  does  not  know  how  much 
the  unliquidated  claim  is  worth,  and  will  allow  parties 
to  bargain  for  the  sale  of  the  unliquidated  claim,  just 
as  it  will  let  them  bargain  for  the  sale  of  a  horse  for 
which  they  may  fix  such  a  price  as  they  choose,  and 
that  price  will  not  be  revised. 

EFFECT  OF  RELEASES  AND  RECEIPTS.— 
If,  however,  the  original  claim  were  liquidated  and 
undisputed,  is  there  any  sort  of  paper  the  debtor  could 
get  from  the  creditor  that  would  release  him  ab- 
solutely? A  receipt  in  full  would  not  do  it;  a  receipt  in 
full  is  something  to  which  business  men  attach  more 
virtue  than  it  possesses.   It  is  merely  evidence  of  an 


60  COMMERCIAL    LAW 

agreement  to  accept  what  has  been  received  in  full 
payment  and  proof  may  be  given  as  to  just  what  con- 
sideration passed  for  the  receipt  in  full.  As  we  have 
seen,  such  an  agreement  is  not  valid  without  con- 
sideration, and  payment  of  part  of  a  debt  admittedly 
due  is  not  sufficient  consideration.  The  really  effective 
instrument  at  common  law  is  the  release  under  seal. 
That  will  do  the  work  whether  the  debtor  paid  part 
of  the  debt  or  not,  since  a  sealed  instrument  needs  no 
consideration.  In  jurisdictions  where  seals  have  been 
deprived  of  their  efficacy  at  common  law  an  insuper- 
able difficulty,  however,  exists.  In  a  few  States — Ala- 
bama, Arkansas,  Connecticut,  Michigan,  Mississippi, 
New  Hampshire,  New  York,  North  Dakota,  South 
Dakota,  Tennessee — a  receipt  in  full  has  been  given 
the  effect  which  the  common  law  gave  to  a  sealed 
instrument. 

OTHER  ILLUSTRATIONS.— Suppose  the 
agreem.ent  to  settle  a  liquidated  claim  were  oral  and 
suppose  a  witness  heard  the  words.  Such  circum- 
stances would  not  make  any  difference.  It  is  assumed 
in  all  that  has  been  said  that  the  facts  are  proved. 
Suppose  that  neither  party  denied  the  facts.  Let  the 
creditor  admit  that  he  did  receive  this  $50  as  a  full 
payment  and  did  give  the  debtor  a  receipt  in  full. 
Still,  he  can  say,  "I  propose  to  break  my  agreement 
since  it  was  not  supported  by  sufficient  consideration, 
and  I  shall  collect  the  balance.'*  Another  question  is 
this:  Suppose  a  man  had  a  $100  bill  and  he  wanted 
some  change  very  badly,  and  another  man  had  $99. 
Could  the  former  take  that  for  the  $100  bill?  He  could. 


COMMERCIAL    LAW  61 

If  a  man  wants  a  particular  kind  of  money,  as  gold, 
or  silver,  or  quarters,  the  principles  stated  do  not 
apply;  they  apply  only  to  dollars  and  cents  as  such. 

PAST  CONSIDERATION.— Strictly  speaking, 
the  term  past  consideration  is  a  misnomer ;  something 
which  is  given  before  a  promise  is  made  cannot  con- 
stitute a  legal  consideration.  The  courts  have  held 
that  a  warranty  made  after  a  sale  has  been  completed 
is  invalid.  It  has  also  been  held  that  a  guaranty  after 
the  obligation  guaranteed  has  been  entered  into  also 
is  invalid  unless  there  be  new  consideration.  Al- 
though this  is  the  general  rule,  there  are  several  ex- 
ceptions where  a  past  consideration  is  recognized. 
Williston  gives  these  exceptions  as  follows,  although 
the  boundaries  between  the  groups  are  sometimes  in- 
definite: *'(1)  Promises  to  pay  a  precedent  debt;  (2) 
Promises  in  consideration  of  some  act  previously  done 
by  the  promisee  at  the  request  of  the  promisor;  (3) 
Promises  where  past  circumstances  create  a  moral 
obligation  on  the  part  of  the  promisor  to  perform  his 
promise.  Under  this  head  may  be  included  cases  of 
ratification  and  ?doption  of  promises  previously  made 
for  sufficient  consideration  but  invalid  when  made  for 
lack  of  authority  or  capacity." 

PAYMENT  OF  PART  OF  A  DEBT  BY  ONE 
WHO  IS  NOT  THE  DEBTOR.— Suppose  a  little 
different  case:  A  owes  B  $100  for  a  liquidated  claim. 
A's  father  says  to  B,  "If  you  will  let  my  son  off,  dis- 
charge him  from  this  claim,  I  will  pay  $60,  not  a  cent 
more."  B  agrees,  and  the  $60  is  paid.  Now  B  never 
can  get  any  more;  the  bargain  is  binding,  and  the 


62  COMMERCIAL    LAW 

reason  is,  that  although  A  was  bound  to  pay  the  whole 
$100,  and  could  not,  by  paying  B  a  part  of  the  claim, 
give  good  consideration  to  B  for  his  promise  to  cancel 
the  balance.  A's  father  was  not  bound  to  pay  a  cent 
and  he  may  bargain  for  any  exchange  in  return  for  a 
payment  which  he  was  not  bound  to  make  at  all. 
Therefore,  he  may  bargain  that  the  debt  shall  be  dis- 
charged. 

PERFORMANCE  OR  PROMISE  OF  PER- 
FORMANCE OF  A  LEGAL  DUTY  IS  NOT  SUF- 
FICIENT CONSIDERATION.— In  other  words, 
the  thing  which  will  not  be  good  consideration, 
whether  done  or  promised,  is  the  performance  or  par- 
tial performance  of  something  which  the  man  who 
performs  or  promises  is  under  a  legal  duty  to  do 
anyv/ay.  If  he  ought  to  do  it  anyway,  then  it  will  not 
serve  as  a  price  for  a  new  promise  or  agreement  to 
discharge  it.  Another  illustration  of  that  may  be 
given:  Suppose  a  contractor  agrees  to  build  a  house 
for  $10,000;  he  gets  sick  of  his  job  when  he  is  about 
half  through,  says  that  it  is  not  possible  for  him  to 
make  any  money  at  that  price  and  he  is  going  to  quit. 
"Well,"  the  employer  says,  "if  you  will  keep  on  I  will 
give  you  a  couple  of  thousand  dollars  more."  Accor- 
dingly the  builder  keeps  on.  That  won't  do.  The 
builder  in  keeping  on  building  is  doing  no  more  than 
he  was  previously  bound  to  do.  If  he  wants  to  have 
a  binding  agreement  for  the  extra  $2,000  with  his 
employer,  he  must  secure  a  promise  under  seal,  for  his 
own  promise  of  performance  will  not  support  the 
promise  to  pay. 


COMMERCIAL    LAW  63 

FORBEARANCE  AS  CONSIDERATION.— 
Another  kind  of  consideration  that  is  worth  calling 
attention  to  is  forbearance.  A  has  a  valid  claim 
against  B.  He  says  he  is  going  to  sue.  B  says  if  he 
won't  sue,  or  won't  sue  for  the  present,  B  will  pay 
him  an  agreed  sum.  That  is  a  good  contract  so 
long  as  it  is  not  open  to  the  objection  referred  to  a 
moment  ago;  that  is,  so  long  as  A*S'claim  is  not  for  a 
liquidated  sum  of  money  and  B's  promise  is  not  merely 
a  promise  to  pay  part  of  that  liquidated  sum.  A  may 
promise  what  B  requests,  either  to  forbear  tempora- 
rily or  to  forbear  perpetually.  Either  will  be  good. 
But  suppose  A  has  no  valid  claim  against  B,  but  B  is 
reputed  to  be  rather  an  easy  mark  in  the  community 
and  A  is  a  person  of  little  scruple;  he  accordingly 
trumps  up  a  claim  against  B  with  the  hope  of  getting 
a  compromise.  Is  forbearance  of  that  claim  by  A  good 
consideration  for  B's  promise?  It  is  not.  A's  claim 
must  be  a  bona  fide  one  in  order  to  make  surrender  of 
it  or  the  forbearance  to  press  it,  either  temporarily  or 
permanently,  a  good  consideration  for  a  promise  of 
payment. 

STATUTE  OF  LIMITATIONS.  —  Another 
case  of  a  promise  relating  to  a  subject  of  very  fre- 
quent importance  in  commercial  law,  and  law  gener- 
ally, is  a  promise  to  pay  a  debt  barred  by  the  statute 
of  limitations,  and  this  occasion  requires  a  preliminary 
word  in  regard  to  that  statute.  This  statute  prohibits 
the  bringing  of  an  action  or  a  claim  after  the  expira- 
tion of  a  certain  period.  It  is  a  different  period  for 
different  sorts  of  claims.    Action  on  a  judgment  in 


64  COMMERCIAL    LAW 

most  States  may  be  begun  within  twenty  years  after 
such  judgment  is  rendered ;  so  in  some  States  may  an 
action  on  a  contract  under  seal.  On  the  other  hand, 
ordinary  contractual  claims  generally  expire  in  six 
years.  Claims  in  tort,  that  is,  for  injury  to  person 
or  property,  last  even  a  shorter  time,  but  the  ordinary 
contractual  statute  of  limitations  is  six  years.  The 
statute  begins  to  run  against  a  promissory  note,  or 
other  contract,  not  from  the  time  when  it  is  made,  but 
from  the  time  when  it  is  by  its  terms  to  be  performed. 
A  note  made  now,  payable  the  first  of  January  next, 
will  not  be  barred  until  six  years  from  the  first  of 
January,  not  six  years  from  now;  and  if  it  was  made 
payable  in  ten  years,  as  a  mortgage  note  might  well 
be,  the  statute  would  not  bar  it  for  sixteen  years. 

PROMISE  TO  PAY  BARRED  DEBT.— It  has 
been  held,  though  the  reasons  are  not  very  easy  to 
explain,  that  a  new  promise  will  revive  a  debt  so  far 
as  the  statute  of  limitations  is  concerned.  There  need 
be  no  consideration  for  such  a  promise  other  than  the 
existence  of  the  old  indebtedness;  that  is  said  to  be  a 
sufficient  consideration,  although,  of  course,  it  can 
hardly  be  said  to  be  given  as  a  price  for  the  new 
promise.  Take  a  promissory  note  payable  January  1, 
1905.  If  nothing  happens,  that  is  barred  on  January 
1,  1911,  but  if  in  1911  or  1912  the  maker  says,  in  effect, 
'T  know  I  owe  that  old  note.  I  have  not  paid  is,  but 
I  will  pay  it,"  he  will  be  liable  on  that  new  promise, 
and  the  statute  will  begin  to  run  again  and  run  for  six 
years  from  the  making  of  that  new  promise.  It  is  not 
enough  that  the  debtor  should  admit  that  there  was  a 


COMMERCIAL    LAW  65 

liability;  he  must  promise  to  pay  it  in  order  to  make 
himself  liable.  Suppose,  instead  of  a  new  promise 
made  after  the  statute  had  run  in  1911  or  1912,  the 
maker  had  said  before  the  maturity  of  the  note,  we 
will  say  in  the  course  of  1910,  "Don't  worry  about 
that  note,  I  shall  pay  it,"  that  also  will  start  the  stat- 
ute running  afresh.  In  other  words,  the  new  promise 
may  be  made  before  the  maturity  of  the  note,  or  be- 
fore the  statute  has  completely  run  as  well  as  after 
the  statute  has  completely  run.  In  either  case  the  new 
promise  will  start  a  fresh  liability  and  keep  the  note 
alive  for  six  years  from  the  time  the  new  promise  was 
made.  Of  course,  if  the  new  promise  is  made  the  day 
after  maturity  of  the  old  obligation,  the  total  effect 
will  be  simply  to  extend  the  time  of  the  statute  one 
day,  because  only  one  day  of  the  six  years  had  run  at 
the  time  the  new  promise  was  made,  and  counting 
six  years  from  the  date  of  the  new  promise  gives  only 
one  day  more. 

PART  PAYMENT  OF  BARRED  DEBTS.— 
Not  only  will  a  new  promise  in  express  terms  keep 
the  statute  of  limitations  from  barring  a  claim,  but 
any  part  payment  will  have  the  same  effect,  unless  at 
the  time  the  part  payment  is  made  some  qualification 
is  expressly  stated.  A  debtor  may  say,  "I  will  pay 
you  this  part  of  my  debt,  but  this  is  all,"  and  incur 
no  further  liability ;  but  a  part  payment  without  such 
a  qualification  starts  the  statute  running  afresh  as 
to  the  balance  of  the  debt.  It  is  by  these  part  pay- 
ments that  notes  are  frequently  kept  alive  for  a  long 
series  of  years.  Interest  payments  are  as  effectual  for 


66  COMMERCIAL    LAW 

the  purpose  as  payments  on  account  of  part  of  the 
principal.  A  new  six  years  begins  to  run  from  each 
payment  of  interest.  The  debtor  may,  however,  say, 
"I  will  pay  you  half  this  debt,"  or  "I  will  pay  you  the 
debt  in  installments  of  $10  a  month."  Such  promises 
are  binding  according  to  their  terms,  and  do  away 
with  the  statute  of  limitations  to  that  extent,  but  they 
do  not  enable  the  creditor  to  recover  anything  more 
than  the  debtor  promises.  A  question  may  be  asked 
here  which  is  frequently  of  importance  regarding  an 
outlawed  note  with  a  payment  of  interest  thereon 
by  the  maker.  Would  an  endorser  who  had  waived 
demand  and  notice  be  liable  for  six  years  more?  Yes, 
if  the  payment  was  made  before  the  statute  had  com- 
pletely run  in  favor  of  the  endorser.  Otherwise,  no. 
And  if  the  endorser  had  not  waived  demand  and 
notice,  the  statute  could  in  no  case  be  prolonged 
against  him  by  any  act  of  the  maker. 

REVIVAL  OF  DEBTS  DISCHARGED  BY 
BANKRUPTCY  OR  VOIDABLE  FOR  IN- 
FANCY.— A  somewhat  similar  sort  of  revival  of  an 
old  obligation  may  occur  where  a  debt  is  discharged 
in  bankruptcy.  If  a  discharged  bankrupt  promises  to 
pay  his  indebtedness  or  makes  a  payment  on  account 
of  it,  it  will  revive  his  old  obligation  and  he  will  be 
liable  again.  And,  similarly,  though  one  whom  the 
law  calls  an  infant  (that  is,  a  minor  under  the  age  of 
twenty-one)  who  incurs  indebtedness  prior  to  his 
majority,  can  avoid  liability  (unless  the  indebtedness 
was  incurred  for  what  are  called  necessaries,  that  is, 
food,  clothing,  shelter  and  things  of  that  sort) ;  yet 


COMMERCIAL    LAW  67 

if  he  promises  after  he  has  become  of  age  that  he  will 
pay  these  debts,  from  which  he  might  escape,  there- 
after he  is  liable. 

CONTRACTS  WHICH  MUST  BE  IN  WRIT- 
ING.— There  is,  in  some  contracts,  one  other  requi- 
site, besides  those  already  mentioned,  necessary  to 
make  them  enforceable,  and  that  is  a  writing.  It  has 
already  been  said  that  writing  is  not,  as  such,  essen- 
tial to  the  validity  of  contracts,  but  there  are  excep- 
tional kinds  of  contracts  which  the  law  has  required 
to  be  in  writing  for  many  years.  This  is  by  virtue  of 
what  is  known  as  the  "Statute  of  Frauds."  This  was 
passed  in  England  in  the  year  1676,  and  is  known  as 
"Chapter  3,  of  the  Statute  of  29,  Charles  II."  This 
statute  was  passed  for  the  purpose  of  preventing 
frauds  and  perjuries  which  were  particularly  preva- 
lent at  the  time  it  was  enacted.  It  is  doubtful  as  to 
how  much  good  the  statute  has  accomplished.  There 
is  no  question  that  in  many  cases  it  has  caused  fraud 
and  perjury  rather  than  prevented  it.  The  statute, 
however,  as  passed  in  England,  has  been  reenacted  in 
practically  every  State  in  this  country  with  slight 
modifications,  and  it  is,  therefore,  a  part  of  contract 
law  to  which  attention  must  be  given.  Originally, 
the  statute  read  as  follows:  "No  action  shall  be 
brought  (1)  whereby  to  charge  any  executor  or  ad- 
ministrator upon  any  special  promise  to  answer 
damages  out  of  his  own  estate;  (2)  or  whereby  to 
charge  the  defendant  upon  any  special  promise  to 
answer  for  the  debt,  default,  or  miscarriage  of  another 
person;  (3)  or  to  charge  any  person  upon  any  agree- 


68  COMMERCIAL    LAW 

ment  made  in  consideration  o£  marriage;  (4)  or  upon 
any  contract  or  sale  of  lands,  tenements,  or  heredita- 
ments, or  any  interest  in  or  concerning  them;  (5)  or 
upon  any  agreement  that  is  not  to  be  performed 
within  the  space  of  one  year  from  the  making  thereof ; 
unless  the  agreement  upon  which  such  action  shall 
be  brought,  or  some  memorandum  or  note  thereof 
shall  be  in  writing,  and  signed  by  the  party  to  be 
charged  therewith  or  some  person  thereunto  by  him 
lawfully  authorized."  A  word  of  comment  is  neces- 
sary to  explain  the  general  import  of  these  various 
sections. 

Section  1:  An  executor  or  administrator  is  ap- 
pointed to  settle  a  deceased  person's  estate.  He  is  not 
obliged  to  personally  pay  the  debts  of  the  deceased 
person  out  of  his  own  pocket,  if  the  estate  is  not  suffi- 
cient. His  liability  is  limited  by  the  assets  of  the  de- 
ceased, but  if,  in  order  to  save  the  credit  of  the 
deceased  or  for  any  other  reason,  he  chooses  to  prom- 
ise "to  answer  damages  out  of  his  own  estate"  that 
promise  must  be  in  writing.  This  is  the  situation  re- 
ferred to  by  this  section. 

Section  2 :  This  is  a  very  important  class  and  leads 
us  to  call  attention  to  the  distinction  between  a  guar- 
anty and  a  contract  somewhat  similar.  Suppose  A 
writes  to  Jordan,  Marsh  Company :  "Please  sell  B  six 
good  shirts  and  charge  the  same  to  my  account."  That 
is  not  a  guaranty.  A  is  in  that  case  a  purchaser  just 
as  much  as  if  he  ordered  the  shirts  sent  to  himself. 
Nor  is  it  any  more  a  guaranty  if  it  was  further  agreed 
h^fTxr^en  A  and  B  that  B  should  pay  A  for  the  shirts 


COMMERCIAL    LAW  69 

On  the  other  hand,  if  A  should  write  to  Jordan,  Marsh 
Company,  "Let  B  have  six  shirts  and  if  he  doesn't 
pay,  I  will,"  then  you  would  have  a  guaranty.  It  is  of 
the  essence  of  a  guaranty  that  there  should  be  a  prin- 
cipal debtor  and  that  the  guarantor's  liability  should 
be  only  secondary.  A  guaranty  must  be  in  writing. 
To  put  the  matter  in  another  way,  when  there  are 
three  parties  to  a  transaction  like  the  above,  the  writ- 
ing is  necessary.  Where  there  are  two  parties,  no 
writing  is  necessary.  Where  A  says  to  Jordan,  Marsh 
Company,  "Let  B  have  six  shirts,  and  if  he  doesn't 
pay,  I  will,"  we  have  three  parties:  A,  the  guarantor; 
B,  the  principal  debtor,  and  Jordan,  Marsh  Company, 
the  creditor.  This  must  be  in  writing.  Where  A  says 
to  Jordan,  Marsh  Company  orally,  "Give  B  six  shirts 
and  charge  to  my  account,"  we  have  simply  two  par- 
ties, A,  the  principal  debtor,  and  Jordan,  Marsh  Com- 
pany, the  creditor.  Hence  no  writing  is  necessary.  In 
connection  with  this  section,  it  must  be  kept  in  mind 
that  some  oral  contracts  which  would  be  good  under 
this  section  may  not  be  enforceable  under  another 
section  which  we  shall  refer  to  later,  because  the 
amount  involved  is  over  a  specified  sum. 

Section  3:  The  agreement  referred  to  by  this  sec- 
tion is  not  the  contract  or  promise  to  marry,  but  is 
for  a  marriage  settlement  such  as  a  promise  to  make 
a  payment  of  money  or  a  settlement  of  property  in 
consideration  of  a  marriage  actually  taking  place. 

Section  4:  Any  contract  for  the  sale  of  land,  or 
any  interest  in  or  concerning  land,  requires  a  writing 
in  order  to  make  it  binding.   The  commonest  kind  of 


70  COMMERCIAL   LAW 

contracts  in  regard  to  land  are  leases  or  contracts  for 
leases.  An  oral  lease  creates  what  is  called  a  "tenancy 
at  will,"  that  is,  the  agreement,  in  so  far  as  it  specifies 
a  fixed  term,  is  wholly  invalid,  but  while  the  tenant 
occupies  he  must  pay  at  the  agreed  rate;  but  he  has 
no  right  to  stay  in ;  he  may  be  turned  out,  even  though 
he  pays  his  rent  promptly,  on  notice  equal  to  the  time 
between  rent  days ;  and,  similarly,  he  has  a  right  to  go 
out  on  giving  the  same  short  notice. 

Section  5:  An  agreement  not  to  be  performed 
within  a  year  must  be  in  writing,  and  this  provision 
of  the  statute  has  been  the  subject  of  rather  an  odd 
construction  by  the  courts.  The  words  "not  to  be 
performed  within  a  year"  have  been  construed  to 
mean  "which  cannot  possibly  be  performed  within  a 
year."  Suppose  A  hires  B  for  a  year  from  to-morrow 
and  contrast  with  that  case  a  promise  to  hire  B  for 
B's  life,  or  for  the  promisor's  life.  Now  the  first  of 
those  bargains  is  within  the  statute  and  must  be  in 
writing,  but  the  second,  although  it  seems  for  a  much 
longer  period,  being  for  the  whole  life  of  the  promisor 
or  promisee,  is  not  within  the  statute.  The  man  on 
whose  death  the  promise  depends  may  die  within  a 
year,  so  there  is  a  possibility  of  performance  within  a 
year.  A  promise  to  employ  B  for  all  his  life,  since 
that  may  possibly  be  done  within  a  year,  need  not 
be  put  in  writing.  But  a  promise  to  hire  a  man 
for  a  year  from  to-morrow  cannot  be  performed  in  a 
year.  True,  he  may  die  within  a  year,  and  then  the 
contract  cannot  be  enforced,  but  there  will  be  no  per- 
formance.   What  was  agreed,  by  the  parties,  was  ser- 


COMMERCIAL    LAW  71 

vice  for  a  year  from  to-morrow  and  that  cannot  pos- 
sibly be  done  earlier  than  a  year  from  to-morrow. 

SALE  OF  GOODS.— A  contract  for  the  sale  of 
goods  exceeding  in  value  a  certain  amount  must  also 
be  in  writing  unless  part  or  all  of  the  goods  have  been 
delivered  or  part  or  all  of  the  price  paid.  The  value  of 
the  goods  which  brings  a  sale  within  this  section  of 
the  Statute  of  Frauds  varies  in  different  States,  and 
local  statutes,  therefore,  should  be  consulted  to  ascer- 
tain the  law  in  this  connection. 

Besides  the  kinds  of  contracts  enumerated  in 
the  English  statute  and  which  have  generally  been 
adopted  in  this  country  there  are  two  or  three  other 
classes  of  contracts  which  in  a  number  of  States  are 
required  by  statute  to  be  in  writing.  Of  this  sort  is 
a  contract  to  make  a  will.  That  is  not  a  very  common 
sort  of  contract,  but  sometimes  a  man  promises  in 
consideration  of  certain  services  to  make  a  will  in 
another's  favor.  The  possibility  of  fraud  in  such  cases 
is  considerable.  The  testator  is  always  dead  before 
the  question  comes  up,  and  then  if  the  alleged  prom- 
isee were  allowed  to  prove  by  oral  statements  a  con- 
tract to  bequeath  the  testator's  property  on  terms 
which  the  promisee  says  were  agreed  upon  between 
them,  it  would  afford  a  chance  to  produce  the  same 
effect  as  if  oral  wills  were  allowed.  So  a  contract  of  a 
real  estate  agent  for  commissions  is  in  some  States 
required  to  be  in  writing.  A  contract  with  an  agent 
empowering  him  to  sell  real  estate,  though  not  re- 
garded at  common  law  as  within  the  prohibition  of 
the  section  of  the  statute  for  the  sale  of  an  interest 


72  COMMERCIAL   LAW 

in  land  to  be  in  writing,  is  by  special  enactment  in 
many  States  required  to  be  in  writing.  A  contract 
for  a  loan  of  money  reserving  a  rate  of  interest  higher 
than  that  ordinarily  allowed  by  law  is  sometimes 
required  to  be  in  writing. 

WHAT  CONSTITUTES  WRITING.  — The 
writing  being  a  matter  of  proof,  it  is  not  essential 
that  it  be  made  at  the  time  the  contract  is  entered 
into.  If  made  at  any  time  before  an  action  upon  the 
contract  is  begun,  that  is  a  sufficient  compliance  with 
the  statute.  The  writing,  in  order  to  be  sufficient, 
must  show  who  the  parties  to  the  agreement  are,  if 
not  by  naming  them,  by  such  a  description  as  points 
to  a  specific  person.  Thus  a  letter  addressed  simply 
"Sir,"  and  signed  by  the  party  charged,  but  not  con- 
taining the  name  of  the  person  addressed,  is  not  suffi- 
cient. It  is  also  required  that  all  the  terms  of  the 
contract  appear  in  the  writing,  such  as  the  subject 
matter,  price,  terms  of  credit  or  any  express  warranty, 
but,  as  often  happens,  they  need  not  all  be  expressed 
in  one  writing.  Contracts  are  frequently  made  as 
the  result  of  an  extended  correspondence,  and  in  such 
a  case  the  various  letters  can  be  put  together  and  con- 
strued as  one  writing  if  they  obviously  refer  to  one 
another,  and  thus  all  the  terms  appear  in  writing.  The 
statutes  in  some  States  require  "subscription"  of  the 
signature,  and  in  that  case  the  signing  must  be  at  the 
end ;  but  where  there  is  not  such  requirement  a  sign- 
ing in  the  body  of  the  instrument  is  sufficient. 

ALTERATION  OF  WRITTEN  CONTRACT 
BY  SPOKEN  WORDS.— Failure  to  understand  and 


COMMERCIAL   LAW  73 

observe  the  rule  restricting  parol  evidence  to  vary 
written  contracts  leads  to  a  great  deal  of  trouble.  The 
parol  evidence  rule  is  this:  Where  parties  have  exe- 
cuted a  written  contract  purporting  to  state  the  terms 
of  their  agreement,  the  court  will  not  receive  evidence 
that  they  orally  agreed  to  something  less  or  more  or 
different,  at  or  before  the  time  when  the  written 
agreement  was  executed.  That  written  agreement 
is  taken  as  conclusive  evidence  of  the  contract  made 
at  that  time.  In  trying  to  ascertain  what  the  writing 
means,  however,  the  court  will  permit  the  surround- 
ing circumstances  to  be  shown,  and  the  meaning 
of  technical  or  trade  terms  or  abbreviations  may  be 
proved.  It  may  be  shown  also  that  the  parties  did 
not  intend  the  written  agreement  to  be  effective 
until  some  particular  event  happened ;  but  if  the  writ- 
ing was  executed  as  an  expression  of  the  intention  of 
the  parties  at  that  time,  the  only  endeavor  of  the  court 
will  be  to  ascertain  the  meaning  of  the  written  words 
and  to  enforce  them  as  written.  The  question  of  oral 
agreements  made  subsequent  to  the  writing  is  not  so 
simple.  We  must  here  distinguish  between  (1)  con- 
tracts of  which  the  law  requires  written  evidence 
because  they  are  within  the  Statute  of  Frauds,  and 
(2)  contracts  which  the  law  does  not  require  to  be  in 
writing,  but  which,  nevertheless,  are  written.  Con- 
tracts of  the  latter  sort  may  be  rescinded,  added  to 
or  subtracted  from  by  any  subsequent  agreement 
which  conforms  to  the  requirements  of  the  law  gov- 
erning mutual  consent  and  consideration,  though  of 
course  it  is  very  desirable,  to  avoid  dispute,  that  any 


74  COMMERCIAL    LAW 

variation  or  rescission  of  a  written  contract  should 
itself  be  in  writing.  If,  however,  the  Statute  of  Frauds 
required  the  original  contract  to  be  in  writing,  though 
it  may  orally  be  rescinded,  it  cannot  be  varied  by  oral 
agreement.  To  permit  such  an  oral  agreement  would 
in  effect  violate  the  Statute  of  Frauds  by  permitting 
an  agreement  partly  in  writing  but  partly  oral  to  be 
enforced.  Thus,  if  a  written  contract  for  the  sale  of 
goods  (exceeding  in  value  the  amount  permitted  to 
be  contracted  for  orally)  was  made,  and  the  parties 
afterwards  orally  agreed  to  change  the  price,  the  time 
of  delivery,  or  any  other  terms  of  the  contract,  the 
subsequent  oral  agreement  would  be  invalid. 

THE  LIMITS  OF  CONTRACTUAL  RELA- 
TIONS.— As  a  general  rule  a  contract  does  not  im- 
pose liabilities  or  confer  rights  on  a  person  v/ho  is 
not  a  party  to  it.  It  follows  from  the  very  nature  of 
a  contract  that  a  person  who  is  not  a  party  to  it  cannot 
be  included  in  the  rights  or  liabilities  which  it  creates, 
so  that  he  will  be  entitled  to  sue  or  render  himself 
liable  to  be  sued  upon  it.  A  contract  is  the  result  of  a 
voluntary  agreement  entered  into  by  the  parties. 
Therefore,  any  contractual  rights  or  liabilities  exist- 
ing by  virtue  of  such  voluntary  agreement  between 
Smith  and  Jones  are  no  concern  of  White  and  Black. 
They  cannot  be  bound  by  any  of  the  provisions  of 
the  contract  between  Smith  and  Jones,  nor  can  a 
breach  of  that  contract  give  them  any  rights.  There 
are  apparent  exceptions  to  the  rule  we  have  just  men- 
tioned. One  is  in  the  case  of  agency.  Here  one  per- 
son represents  another  in  entering  into  a  contract. 


COMMERCIAL   LAW  75 

A  contract,  however,  made  by  an  agent  can  bind  a 
principal  only  by  force  of  a  previous  authority  or  a 
subsequent  ratification,  so  that  really  the  contract 
v^hich  binds  the  principal  is  his  own  contract.  The 
other  exception  is  where  the  rights  and  liabilities  cre- 
ated by  a  contract  may  pass  to  a  person  other  than  the 
original  party  to  it,  either  by  act  of  the  parties  them- 
selves or  by  operation  of  law.  Such  would  be  the  case 
where  Smith  and  Jones  have  performed  the  terms  of 
their  contract  except  that  Smith  has  not  paid  the 
agreed  amount  to  Jones.  Jones  assigns  his  right  to 
collect  this  amount  to  White.  Such  an  assignment  is 
permissible,  as  we  will  learn  when  we  consider  that 
subject  later  on.  Such  is  an  assignment  by  act  of  the 
parties  themselves.  Even  this  exception  is  limited, 
as  the  obligations  incurred  in  purely  personal  service 
contracts  are  not  subject  to  assignment.  Thus,  if  I 
employ  artist  Greene  to  paint  my  portrait,  he  could 
not  assign  this  contract  and  compel  me  to  accept  a 
portrait  painted  by  artist  Brown. 

THE  RULE  OF  LAWRENCE  v.  FOX.— We 
shall  now  take  up  a  very  generally  recognized  excep- 
tion to  the  principle  we  have  just  discussed.  The 
question  in  its  simplest  form  is  this:  If  Smith  and 
Jones  make  a  contract  for  the  benefit  of  Greene,  may 
Greene  sue  on  that  contract?  From  what  we  have 
said  in  the  preceding  paragraph  a  negative  answer 
might  seem  to  be  correct.  However,  to-day,  stated  in 
general  terms,  and  leaving  out  of  the  question  the 
limitations  recognized  in  various  jurisdictions,  the 
very  general  rule  is  that  a  third  party  (Greene  in  our 


76  COMMERCIAL   LAW 

illustration)  may  enforce  a  promise  made  for  his 
benefit,  even  though  he  is  a  stranger  both  to  the  con- 
tract and  to  the  consideration.  In  other  words,  it 
is  held  not  to  be  necessary  that  any  consideration 
move  from  the  third  party.  It  is  enough  if  there  is  a 
sufficient  consideration  betv^een  the  parties  who  make 
the  agreement  for  the  benefit  of  the  third  party.  So 
in  the  leading  case  of  Lawrence  v.  Fox,  20  New  York 
268,  where  a  debtor  of  the  plaintiff  had  loaned  money 
to  the  defendant  and  the  defendant  had  promised  him 
to  pay  the  plaintiff,  although  the  plaintiff  was  not  a 
party  to  the  contract,  it  was  held  that  where  a  promise 
is  "made  to  one  for  the  benefit  of  another,  he  for  whose 
benefit  it  is  made  may  bring  an  action  for  its  breach." 
QUALIFICATION  OF  RULE.— We  must  call 
attention  to  one  qualification  quite  generally  recog- 
nized. Under  this  rule,  that  a  beneficiary  may  enforce 
a  contract,  it  is  necessary  that  the  contract  must  have 
been  intended  for  the  benefit  of  a  third  person.  It  is 
not  sufficient  that  the  performance  may  just  happen 
to  benefit  a  third  person ;  it  must  have  been  intended 
for  the  benefit  of  a  more  or  less  definite  person.  Thus, 
where  a  county  board  had  entered  into  a  contract  with 
a  construction  company  which  was  building  a  bridge 
for  it  and  maintaining  a  temporary  foot  bridge  during 
the  operation,  by  the  terms  of  which  contract  the  con- 
struction company  assumed  responsibility  for  all  in- 
juries suffered  by  pedestrians  using  the  temporary 
foot  bridge,  it  was  held  that  a  person  who  was  injured 
because  of  the  failure  to  light  the  foot  bridge  properly, 
was  not  such  a  third  person  as  might  sue  under  the 


COMMERCIAL    LAW  77 

rule  of  Lawrence  v.  Fox,  on  the  contract  made  be- 
tween the  county  board  and  the  construction  com- 
pany. 

APPLICATION  OF  RULE.— The  rule  in  Law- 
rence V.  Fox  has  been  applied  to  contracts  under  seal 
in  many  jurisdictions,  although  there  are  some  deci- 
sions to  the  contrary.  A  common  application  of  this 
doctrine  is  found  in  the  sale  of  real  property  with  a 
mortgage  upon  it.  The  new  purchaser  as  a  part  of  the 
purchase  price  makes  an  agreement  whereby  he  as- 
sumes the  payment  of  the  mortgagee.  The  question  of 
whether  the  mortgagee,  who  is  really  the  third  party 
for  whose  benefit  the  contract  is  made,  may  sue  the 
new  owner,  is  generally  answered  in  the  affirmative. 

CAPACITY  OF  PARTIES.— All  persons  are 
ordinarily  presumed  to  be  capable  of  contracting,  but 
the  law  imposes  upon  some — in  varying  amounts  and 
for  their  own  protection — disabilities  to  make  con- 
tracts which  may  be  enforced  against  them ;  and,  upon 
some,  for  considerations  of  public  policy,  disabilities 
to  make  enforceable  contracts.  These  persons  are  (1) 
Infants;  (2)  Insane  persons;  (3)  Drunkards;  (4) 
Married  women — to  a  limited  extent;  (5)  Aliens; 
(6)  Artificial  persons  or  corporations. 

WHO  ARE  INFANTS.— All  persons  under  the 
age  of  twenty-one  are  considered  infants,  except  that 
in  some  States,  by  statute,  women  attain  their  major- 
ity at  eighteen.  The  law  endeavors  to  protect  those 
who  have  no  experience  and  judgment  against  the 
loss  of  their  property  because  of  their  inability  to  deal 
safely  with  others  who  might  take  an  advantage  of 


78  COMMERCIAL    LAW 

that  fact.  It  may  well  be  that  one  who  has  nearly 
attained  his  majority  is  as  able  in  fact  to  protect  his 
interests  as  one  of  full  age,  but  the  essence  of  the  law  is 
that  it  is  a  rule  of  universal  application,  and  the  law 
cannot  measure  the  ability  in  each  particular  case.  To 
do  the  greatest  good  for  the  greatest  number,  there- 
fore, it  conclusively  presumes  that  those  under 
twenty-one  have  not  yet  gained  the  ability  to  cope 
with  others  in  the  preservation  of  their  property. 

CONTRACTS  OF  AN  INFANT.— An  infant's 
contracts  are  voidable;  that  is,  though  they  bind  the 
other  party  to  the  bargain  the  infant  himself  may 
avoid  them.  If  he  avoids  them  the  adult  with  whom 
he  contracted  is  entitled  to  recover  whatever  he  may 
have  given  the  infant  which  still  remains  in  the  lat- 
ter's  possession;  but  if  the  infant  has  spent  or  used, 
or  for  any  reason  no  longer  has  the  consideration 
which  the  adult  gave  him,  the  infant  may  avoid  his 
own  obligation  if  he  has  not  already  performed  it,  and 
if  he  has  already  performed  it  he  may  reclaim  what 
he  has  given.  After  he  comes  of  age,  but  not  before, 
the  infant  may  ratify  his  contracts  and  they  then  be- 
come binding  upon  him.  The  retention  after  coming 
of  age  of  property  received  by  the  infant  during  his 
minority  amounts  to  a  ratification.  There  are  a  few 
obligations  of  an  infant  which  on  grounds  of  public 
policy  are  binding  upon  him.  This  is  true  of  a  con- 
tract to  perform  military  service.  The  marriage  of 
an  infant  is  binding  though  his  engagement  is  not. 
It  is  frequently  said  that  his  contract  for  necessaries 
is  binding;  strictly  this  is  not  true.     The  infant  is 


COMMERCIAL    LAW  79 

liable  for  necessaries,  but  his  obligation  does  not  de- 
pend upon  his  contract;  it  is  an  obligation  imposed 
by  law — what  has  been  called  a  quasi-contract.  The 
importance  of  this  distinction  is  shown  if  the  price 
agreed  upon  exceeded  the  real  value  of  the  neces- 
saries. If  the  contract  were  binding,  the  infant  would 
be  bound  to  pay  the  agreed  price,  but  in  fact  he  is 
liable  only  for  the  fair  value.  What  is  necessary  for 
an  infant  depends  upon  his  station  in  life,  upon 
whether  he  already  has  a  sufficient  supply  of  the  nec- 
essary article  in  question,  and  upon  whether  he  is 
receiving  proper  support  from  a  parent  or  guardian. 
The  privilege  of  an  infant  is  generally  held  to  exist 
even  though  the  party  dealing  with  him  not  only  rea- 
sonably believed  the  infant  of  age,  but  had  received 
actual  representations  from  the  infant  to  that  effect. 
INSANE  PERSONS  AND  DRUNKARDS.— 
The  law  affords  protection  to  insane  persons  and,  to 
a  less  extent,  to  drunkards,  for  the  same  reason  as  in 
the  case  of  infants,  namely,  that  those  who  are  inca- 
pable of  understanding  what  they  are  doing  and  of 
comprehending  the  effect  of  their  contracts  upon  their 
property  should  be  safeguarded  against  the  designs 
of  the  more  capable.  This  protection  is  given  them  by 
declaring  some  of  their  contracts  void,  and  allowing 
them,  or  those  legally  representing  them,  to  avoid  all 
others  with  the  exception  of  a  few.  Also,  as  in  the 
case  of  infants,  this  privilege  as  to  such  contracts  is 
for  the  insane  person's  protection  only,  and  the  other 
party  to  the  contract  may  not  avoid  it  by  pleading 
that  it  was  made  with  an  incompetent  person. 


80  COMMERCIAL   LAW 

WHOM  DOES  THE  LAW  CONSIDER  IN- 
SANE?— Modern  science  has  clearly  established  that 
a  person  may  be  insane  on  one  subject,  and  yet  pos- 
sess a  clear  understanding  and  be  perfectly  sound  on 
another.  If  the  contract  deals  with  a  subject  of  which 
the  person  has  a  clear  understanding,  he  is  not  in 
need  of  protection  and  is  given  none.  Those  only  are 
given  the  protection  who  do  not  possess  the  mind  to 
understand  in  a  reasonable  manner  the  nature  and 
effect  of  the  act  in  which  they  engage. 

BINDING  OBLIGATIONS  FOR  NECES- 
SARIES.— The  insane  must  live  as  well  as  the  sane; 
consequently  they  are  bound  to  pay  for  necessaries 
furnished  them  but  only  the  reasonable  value,  as  has 
been  explained  in  the  case  of  infants.  The  rules  for 
determining  what  these  necessaries  may  be  are  the 
same  as  in  the  case  of  infants. 

OTHER  CONTRACTS.— It  is  often  a  difBcult 
matter  to  know  when  a  person  is  insane,  much  more 
difficult  than  it  is  to  determine  a  person's  age.  One 
of  the  contracting  parties  may  have  acted  in  perfect 
good  faith,  being  ignorant  of  the  other's  unsound- 
ness of  mind  and  having  no  judicial  determination  of 
insanity  or  other  warning  to  put  him  on  his  guard. 
The  contract  even  may  be  reasonable  in  its  terms,  and 
it  may  have  been  so  acted  upon  that  the  parties  to 
it  cannot  be  restored  to  their  original  position.  In 
such  a  case,  while  the  law  should  protect  the  incom- 
petent, it  would  be  clear  injustice  to  protect  him  to 
such  an  extent  as  to  make  the  other  party  suffer 
through  no  fault  of  his  own.    It  has  been  quite  gen- 


COMMERCIAL    LAW  81 

erally  determined  in  this  country,  therefore,  that 
where  a  person  does  not  know  of  the  other's  in- 
sanity and  there  has  been  no  judicial  determination 
of  such  insanity  to  notify  the  world  of  it,  and  the  con- 
tract is  a  fair  one,  and  has  been  so  acted  upon  that  the 
parties  cannot  be  restored  to  their  original  position, 
it  is  binding  upon  the  lunatic  as  well  as  upon  the  other 
party. 

VOID  CONTRACTS.— In  some  States  it  is  held, 
however,  that  all  contracts  of  an  insane  person  are 
void.  In  such  States  the  rule  above  stated  would  not 
hold.  The  law  of  each  State  must  be  consulted  to 
determine  the  law  in  the  particular  State.  In  some 
States,  notably  New  York  and  Massachusetts,  an  in- 
sane person's  deed  of  lands  has  been  held  to  be  void, 
without  reference  to  whether  or  not  the  other  party 
entered  into  the  contract  in  good  faith  without  notice, 
or  that  it  has  been  so  far  acted  upon  that  the  parties 
cannot  be  restored  to  their  original  position.  As  in 
the  case  of  infants,  an  insane  person's  power  of  attor- 
ney has  been  declared  by  high  authority  to  be  abso- 
lutely void. 

VOIDABLE  CONTRACTS.— In  most  jurisdic- 
tions an  insane  person's  contracts  are  voidable  by  him 
or  by  his  guardian,  provided  (1)  that  the  other  person 
knew  of  his  insanity  at  the  time  of  making  the  con- 
tract, or  (2)  he  had  been  declared  insane  by  some 
court,  or  (3)  the  parties  can  be  restored  to  their  orig- 
inal position. 

RATIFICATION  AND  AVOIDANCE.— 
When  the  insane  person's  reason  has  been  restored. 


82  COMMERCIAL   LAW 

if  the  contract  is  a  voidable  one,  as  explained  in  the 
foregoing  rules,  though  he  may  by  acts  or  words  avoid 
the  contract  he  made  during  his  insanity,  he  may  in 
like  manner  ratify  it,  or  he  may  ratify  it  by  not  avoid- 
ing it  within  a  reasonable  time  after  recovering  his 
reason  while  continuing  to  keep  something  capable 
of  being  returned,  which  he  obtained  under  the  con- 
tract. 

WHAT  CONSTITUTES  DRUNKENNESS.— 
It  is  not  ordinary  drunkenness  which  excuses  a  man 
from  his  contracts,  and  enables  him  to  claim  the  pro- 
tection given  generally  to  incapable  persons.  The 
person  must  have  been  utterly  deprived  of  his  reason 
and  understanding,  so  that  he  could  not  comprehend 
the  nature  or  effect  of  the  act  in  which  he  was  en- 
gaged. That  he  was  so  much  under  the  influence  of 
liquor  that  his  judgment  was  not  as  good  as  in  his 
normal  state  does  not  excuse  him. 

MARRIED  WOMEN.— It  is  practically  impos- 
sible to  state  in  brief  form  the  law  upon  the  subject  of 
married  women's  contracts.  The  difficulty  arises  from 
the  diverse  changes  made  in  the  plain  and  clear  rules 
of  the  common  law  by  statutes  in  the  different  States. 
The  old  law  is  wholly  incompatible  with  the  enlight- 
ened view  now  held  in  regard  to  women,  their  family, 
social  and  business  standing,  and  the  changes  have 
been  made  to  give  them  the  rights  to  which  they  are 
justly  entitled.  But,  inasmuch  as  the  statutes  have 
not  been  uniform  in  the  different  States,  the  law 
to-day  is  not  wholly  uniform.  The  statutes  and  deci- 
sions in  each  State  must  be  consulted  to  determine 


COMMERCIAL    LAW  83 

the  law  on  the  subject  as  it  is  to-day.  Through  these 
changes  the  law  has  become  very  complicated,  and 
business  men  should  obtain  legal  advice  before  enter- 
ing into  important  business  dealings  with  married 
women. 

THE  OLD  RULE.—Upon  her  marriage  a 
woman's  existence  became  merged  in  that  of  her 
husband,  and  the  husband  and  wife  were  regarded 
for  many  purposes  as  one  person.  What  tangible 
personal  property  she  had  became  his  immediately 
upon  marriage,  and  he  had  the  right  to  reduce  her 
bills,  notes,  bonds  and  other  debts  to  his  posses- 
sion. Her  real  property  she  retained  the  title  to, 
subject  to  the  right  of  the  husband  to  have  the  use 
of  it  during  his  life,  if  children  were  born  of  the  mar- 
riage. He  was  bound  to  supply  her  with  necessaries, 
and  so  long  as  he  did  this  her  contracts  for  things 
of  even  ordinary  use  were  void;  but  if  he  failed  to 
supply  the  necessaries  her  contract  for  them  would 
be  valid.  All  her  other  contracts  were  absolutely  void 
— not  voidable.  Her  position,  then,  was  worse  than 
an  infant's.  She  could  have  personal  property  of  her 
own  only  if  it  was  given  to  someone  else  to  hold  the 
title  and  pay  over  the  income  to  her,  and  even  this 
"separate  estate,"  as  it  was  called,  could  not  be  bound 
by  her  contracts. 

CHANGES  MADE  BY  STATUTE.— The  law 
of  married  women's  contracts  has  been  greatly 
changed  by  legislative  enactments,  to  give  married 
women  the  rights  which  the  more  enlightened  view 
of  the  present  time  accords  to  them.  The  first  changes 


84  COMMERCIAL   LAW 

aimed  quite  generally  to  give  her  greater  rights  over 
her  "separate  estate,"  giving  her  pov^er  to  make  bind- 
ing contracts  v^^ith  reference  to  it,  or  to  make  binding 
contracts  if  she  were  carrying  on  a  trade  or  business 
of  her  own.  But  the  earlier  statutes  frequently  did 
not  give  her  power  to  contract  with  her  husband,  or 
to  make  binding  contracts  if  she  had  no  separate 
estate,  or  was  not  carrying  on  a  separate  business. 
Later  enactments  have  largely  corrected  these  de- 
fects, but  the  old  rule  still  stands  except  as  it  has  been 
changed  by  statute,  and,  therefore,  the  statutes  of 
each  State  and  the  decisions  interpreting  them  must 
be  consulted  to  determine  accurately  the  law  in  each 
State.  It  may,  however,  be  said  that  generally  a 
married  woman  may  now  contract  except  with  her 
husband,  and  except  as  surety  for  him.  In  many 
States  she  can  even  make  contracts  of  these  excepted 
classes. 

ALIENS. — An  alien  is  one  born  out  of  the  juris- 
diction of  the  United  States,  of  a  father  not  a  citizen 
of  this  country,  and  who  has  not  been  naturalized. 
In  times  of  peace,  aliens  may  hold  property  and  make 
contracts  and  seek  the  protection  of  our  courts  as 
freely  as  citizens.  When  war  breaks  out  between 
this  country  and  another  the  making  of  contracts 
between  citizens  of  the  two  countries  is  prohibited. 
If  such  contracts  are  made  during  a  state  of  war,  they 
are  illegal  and  void,  and  the  courts  of  this  country 
will  not  lend  their  aid  to  enforce  them,  either  during 
the  war  or  after  its  termination.  Contracts  made 
before  the  war  breaks  out  are  good,  but  cannot  be 


COMMERCIAL    LAW  85 

enforced,  nor  can  remedies  for  their  breach  be  ob- 
tained, while  the  war  is  in  progress.  When  the  war 
ceases,  however,  the  courts  will  lend  their  aid  to  the 
enforcement  of  such  contracts. 

CORPORATIONS.— A  corporation  may  con- 
tract as  freely  as  an  individual  so  long  as  its  con- 
tracts are  within  the  business  powers  and  scope  of 
the  business  which  its  charter  authorizes  it  to  con- 
duct. And  even  if  a  corporation  has  made  a  con- 
tract outside  of  the  scope  of  its  business,  and  the 
contract  has  been  acted  upon  so  that  either  party 
has  had  the  benefit  of  the  contract,  an  action 
will  lie  in  favor  of  the  other  for  the  benefits  so 
conferred.  But  a  contract  outside  of  the  business 
which  its  charter  permits  the  corporation  to  engage 
in,  and  which  is  wholly  executory,  the  courts  will  not 
enforce.  Such  contracts  are  said  to  be  ultra  vires. 
Contracts  with  a  corporation  may  be  in  the  same 
form  as  contracts  between  individuals,  and  the  cor- 
poration need  use  its  seal  only  where  an  ordinary 
person  is  required  to  use  one.  The  officer  or  officers 
making  the  contract  on  behalf  of  a  corporation  must, 
however,  be  authorized  so  to  do  either  by  the  directors 
or  by  the  general  powers  attached  to  such  officers. 
In  law  corporations  are  deemed  to  be  artificial  per- 
sons subject  in  a  general  way  to  provisions  governing- 
natural  persons. 


CHAPTER  III 


Contracts — Performance  and 
Termination 

PRIMARY  RULE.— After  a  contract  has  been 
formed,  it  does  not  make  much  difference 
whether  it  is  under  seal  or  whether  it  is  a  simple 
contract ;  the  rules  governing  the  contract,  subsequent 
to  its  formation,  are  very  much  the  same  though  there 
are  a  few  distinctions.  The  primary  rule  running 
through  the  law,  governing  obligations  to  perform 
contracts,  is  that  if  a  man  has  once  formed  a  good 
contract  he  must  do  as  he  agreed,  and  if  he  fails  sub- 
stantially (not  merely  slightly)  to  do  so  the  other 
party  may  refuse  to  perform  on  his  part.  If  you  re- 
member that  fundamental  principle  you  cannot  gen- 
erally go  far  wrong. 

CONDITIONAL  CONTRACTS  —  INSUR- 
ANCE.— What  one  agrees  to  often  depends  on  the 
conditions  which  he  includes  as  part  of  his  promise. 
Take  the  insurance  policy  previously  alluded  to.  An 
insurance  company  promises  to  pay  $5,000,  but  it 
does  not  promise  to  pay  in  any  event;  the  condition 
"if  the  house  burns  down"  is  obviously  a  qualification 
of  the  promise.  But  there  are  other  conditions  in  the 
insurance  policy.  The  insurance  company  says  that 
it  will  not  be  liable  if  gasoline  is  kept  in  the  house 
beyond  a  small  quantity  necessary  for  cleaning.  That, 
too,  is  a  condition  of  its  promise  to  pay  $5,000;  so  that 

86 


COMMERCIAL    LAW  87 

"if  the  house  burns  down,"  "if  gasoline  is  not  kept 
in  the  house,"  "if  the  house  is  not  unoccupied  more 
than  three  months,"  and  "if  mechanics  are  not  al- 
lowed in  possession  of  the  property  for  more  than  a 
certain  length  of  time,"  are  all  conditions,  and  the 
company's  main  promise  need  only  be  kept  if  the  con- 
ditions are  complied  with.  That  is  why  an  insurance 
policy  is  not  always  quite  as  good  as  it  seems — be- 
cause there  is  a  large  promise  in  large  print ;  but  there 
are  a  good  many  qualifications  in  smaller  print  which 
are  really  part  of  the  promise  and  must  be  taken  into 
account. 

CONDITIONS  IN  BUILDING  CONTRACTS. 
— Another  kind  of  conditional  promise  often  occurs 
in  building  contracts.  The  employer  agrees  to  pay 
the  builder  or  contractor  on  the  production  of  an 
architect's  certificate.  Now  it  doesn't  do  the  builder 
any  good  to  build  that  house  unless  he  gets  the  archi- 
tect's certificate,  for  he  has  been  promised  pay  only 
on  condition  that  he  produce  it.  That  is  the  promise 
between  the  parties.   That  is  the  only  promise. 

WHEN  PERFORMANCE  OF  CONDITIONS 
IS  EXCUSED. — It  is  obvious  that  these  conditions 
in  promises  may  be  sometimes  used  to  defeat  the  ends 
of  justice,  and  undoubtedly  at  times  they  are  so  used. 
A  person  who  draws  a  contract  cleverly  will  put  in  a 
great  many  conditions  qualifying  his  own  liability, 
and  will  try  to  make  the  promise  on  the  other  side  as 
unconditional  as  possible.  The  law  cannot  wholly  do 
away  with  these  conditions,  because  in  general,  so 
long  as  parties  do  not  make  illegal  bargains,  they  have 


88  COMMERCIAL   LAW 

a  right  to  make  such  bargains  as  suit  themselves.  The 
court  cannot  make  their  agreement  for  them,  but  it  is 
held  that  if  a  condition  will  lead  to  a  real  forfeiture 
by  an  innocent  promisee,  the  law  will  relieve  the 
promisee.  Thus,  in  the  architect's  certificate  case,  if 
the  house  was  properly  built  and  it  was  merely  ill 
temper  on  the  part  of  the  architect  that  caused  him 
to  withhold  giving  the  certificate,  the  court  would 
allow  the  builder  to  recover,  and  even  if  the  architect 
had  some  good  reason  for  refusing  the  certificate,  the 
court  would  not  allow  the  builder  to  be  permanently 
prevented  from  recovering  anything  on  the  contract, 
providing  the  builder  had  substantially  though  not 
entirely  performed  his  contract  and  had  acted  in  good 
faith.  If,  however,  his  default  was  wilful,  if  he  had 
tried  to  beat  the  specifications,  and  the  architect  had 
found  him  out  and  therefore  refused  the  certificate, 
the  only  thing  the  builder  could  do  would  be  to  go  at 
it  again,  tear  out  his  faulty  construction  and  build  as 
he  had  agreed. 

IN  CONTRACTS  OF  EMPLOYMENT, 
WORK  MUST  BE  PERFORMED  BEFORE  PAY- 
MENT IS  DUE.— There  are  other  matters  which 
qualify  the  obligation  of  a  promisor  to  perform  be- 
sides express  conditions  such  as  those  we  have  alluded 
to.  Take  this  case:  John  promises  to  work  for  the 
A.  B.  Company;  the  A.  B.  Company  promises  to  em- 
ploy him  and  to  pay  him  a  salary  of  $1,000  a  year. 
John  comes  to  work  the  first  day  and  works  a  while, 
and  then  he  says  he  would  like  his  thousand  dollars. 
The  A.  B.  Company  says,  "Well,  you  have  got  to  do 


COMMERCIAL    LAW  89 

your  work  first."  John  says,  "Why  should  I  work 
first  and  trust  you  for  pay,  rather  than  you  pay  first 
and  trust  me  for  the  work?  I  will  keep  on  working, 
but  I  want  the  pay  now."  Of  course,  the  employer  is 
right  in  refusing  to  pay  until  the  work  has  been  done, 
even  though  the  promise  of  the  employer  is  not  ex- 
pressly qualified  by  the  statement  that  after  the  work 
has  been  done  he  will  pay  $1,000.  It  has  been  dictated 
by  custom,  rather  than  by  anything  else,  that  where 
work  is  to  be  performed  on  one  side  and  money  to  be 
paid  on  the  other,  in  the  absence  of  any  statement  in 
the  contract  to  the  contrary,  the  work  must  be  done 
before  the  pay  is  given.  The  result  is  this :  that  John 
must  work  anyway,  his  promise  to  work  being  abso- 
lute ;  but  the  employer's  promise  to  pay  the  money  is, 
in  effect,  conditional.  It  is  subject  to  an  implied  con- 
dition, as  it  is  called,  that  John  shall  have  done  the 
work  he  agreed  to  do.  The  promise  of  the  employer 
is,  in  effect,  "I  will  pay  if  you  previously  have  done 
the  work."  But  John's  promise  is  absolute:  "I  will 
work."  He  has  to  trust  for  the  pay. 

PERFORMANCE  FIRST  DUE  UNDER  A 
CONTRACT  MUST  BE  GIVEN  BEFORE  PER- 
FORMANCE SUBSEQUENTLY  DUE  FROM 
THE  OTHER  PARTY  CAN  BE  DEMANDED.— 
And  that  case  is  an  illustration  of  a  broader  principle 
which  may  be  stated  in  this  way :  where  the  perform- 
ance promised  one  party  to  a  contract  is  to  precede  in 
time  the  performance  by  the  other  side,  the  party  who 
is  to  perform  first  is  bound  absolutely  to  perform; 
whereas  the  party  who  is  to  perform  subsequently 


90  COMMERCIAL    LAW 

may  refuse  to  perform  unless  and  until  the  other  party 
performs.  In  the  cases  thus  far  alluded  to,  the  prom- 
ises of  the  two  parties  could  not  be  performed  at  the 
same  time.  You  cannot  work  for  a  year  and  pay  $1,000 
simultaneously.  One  performance  takes  a  whole  year 
and  the  other  performance  takes  only  a  moment. 

PERFORMANCES  CONCURRENTLY  DUE. 
— But  frequently  there  arise  cases  where  both  prom- 
ises can  take  place  at  the  same  time.  The  commonest 
illustration  of  that  is  a  contract  to  buy  and  sell.  You 
can  pay  the  price  and  hand  over  the  goods  simultane- 
ously, and  when  a  contract  is  of  this  character,  that 
is,  where  both  performances  can  be  rendered  at  the 
same  time,  the  rule  is  that  in  the  absence  of  agree- 
ment to  the  contrary,  they  must  be  performed  simul- 
taneously. John  agrees  to  buy  James'  horse  and  pay 
$200  for  it,  and  James  agrees  to  sell  the  horse  for 
$200 ;  that  is  a  bilateral  contract  of  purchase  and  sale. 
Now  suppose  neither  party  does  anything,  has  each 
party  broken  his  promise?  It  might  seem  so,  for  John 
has  not  bought  the  horse  or  paid  for  it  as  he  agreed, 
nor  has  James  sold  the  horse.  But  where  each  party 
is  bound  to  perform  simultaneously  with  the  other, 
if  either  wants  to  acquire  any  rights  under  the  con- 
tract he  must  do  what  is  called  putting  the  other  party 
in  default,  that  is,  he  must  offer  to  perform  himself. 
John,  therefore,  must  go  to  James,  offer  $200  and  de- 
mand the  horse  if  he  wants  to  assert  that  James  has 
broken  his  contract.  And  James,  on  the  other  hand, 
if  he  wishes  to  enforce  the  contract,  must  go  with  the 
horse  to  John  and  say,  "Here  is  the  horse  which  I 


COMMERCIAL    LAW  91 

will  hand  over  to  you  on  receiving  simultaneously  the 
$200  which  you  promised  me  for  it."  The  obligation 
of  the  two  promises  when  they  can  be  performed 
simultaneously  is  called  concurrently  conditional, 
that  is,  each  party  has  a  concurrent  right  to  perform- 
ance by  the  other,  and  has  a  right  to  refuse  perform- 
ance until  he  receives,  concurrently  with  his  own  per- 
formance, performance  by  the  other  party. 

INSTALLMENT  CONTRACTS.— Sometimes 
contracts  are  more  complicated  than  those  which  we 
have  stated,  such  as  contracts  of  service  and  contracts 
to  buy  and  sell.  This,  for  instance,  is  a  type  of  a  very 
common  sort  of  contract  in  business :  a  leather  manu- 
facturer uses  large  quantities  of  tanning  extract  in 
his  tannery.  He  makes  a  contract  for  a  regular  sup- 
ply, so  many  barrels  each  week  for  a  year,  for  which 
he  agrees  to  pay  a  specified  price  a  barrel  on  delivery. 
For  a  time  the  extract  promised  him  is  sent  just  as 
agreed.  We  will  suppose,  then,  that  perhaps  the  ex- 
tract manufacturer  is  slow  in  sending  what  he  prom- 
ised ;  there  is  a  delay ;  perhaps  the  extract  that  is  fur- 
nished is  not  as  good  as  it  was  or  as  the  contract 
called  for.  What  can  the  leather  manufacturer  do 
about  it?  Of  course,  he  can  keep  on  with  the  contract, 
taking  what  the  extract  manufacturer  sends  him,  get- 
ting as  much  performance  as  he  can,  and  then  sue  for 
such  damages  as  he  may  suffer  because  of  the  failure 
to  give  what  was  promised  completely.  But  he  does 
not  always  want  to  do  that.  Suppose  it  is  necessary 
for  his  business  that  he  should  get  tanning  extract 
and  get  it  regularly.    He  does  not  want  to  wait  and 


92  COMMERCIAL    LAW 

take  chances  on  the  extract  manufacturer's  delays  in 
delivery  and  inferiorities  in  quality.  He  wants  to 
make  a  contract  with  somebody  else  and  get  out  of 
his  bargain  with  the  first  extract  manufacturer  alto- 
gether. May  he  do  so?  No  question  in  contracts 
comes  up  in  business  more  often  than  that.  And  the 
answer  to  the  question  is  this:  it  depends  on  the  ma- 
teriality of  the  breach,  taking  into  consideration  the 
terms  of  the  contract  and  the  extent  of  the  default. 
Is  the  breach  so  serious  as  to  make  it  fair  and  just  in 
a  business  sense  to  call  the  contract  wholly  off;  or 
will  justice  be  better  obtained  by  making  the  injured 
party  keep  on  with  the  contract  and  seek  redress  in 
damages  for  any  minor  default? 

MATERIALITY  OF  BREACH  IN  CON- 
TRACTS OF  EMPLOYMENT.— The  same  thing 
comes  up  very  often  in  contracts  of  employment.  Sup- 
pose an  employer  hires  an  employee  for  a  year,  and 
in  the  course  of  the  year  the  employee  at  some  time 
or  other  fails  to  fulfill  his  contractual  duty  as  an  em- 
ployee. He  is  negligent  and  in  some  respect  fails  to 
comply  with  his  contract  to  render  good  and  efficient 
service.  Can  the  employer  discharge  him?  We  must 
ask  how  serious  is  the  breach.  A  merely  negligent 
breach  of  duty  is  not  so  serious  as  one  which  is  wilful. 
Or  the  breach  might  be  on  the  other  side  of  the  con- 
tract. Suppose  the  employer  has  promised  to  pay  a 
certain  sum  each  month  as  salary  during  the  year, 
and  does  not  pay  promptly.  Has  the  employee  a 
right  to  say,  "You  pay  my  salary  on  the  first  day  of 
of  the  month  as  you  agreed,  or  I  leave"  ?  No,  he  does 


COMMERCIAL   LAW  93 

not  have  a  right  to  speak  so  positively  as  that.  A 
single  day's  delay  in  the  payment  of  one  month's  in- 
stalment of  salary  would  not  justify  throwing  up  a 
year's  contract.  On  the  other  hand,  if  the  delay  ran 
along  for  any  considerable  time,  it  would  justify  the 
employee  in  refusing  to  continue.  You  will  see  that 
this  principle  of  materiality  of  the  breach  on  one  side, 
as  justifying  a  refusal  to  perform  on  the  other,  is 
rather  an  indefinite  one.  It  involves  questions  of  de- 
gree. That  is  so  in  the  nature  of  the  case.  The  indefi- 
niteness  of  the  rule,  therefore,  cannot  very  well  be 
helped. 

ILLUSTRATIONS  AND  DISTINCTIONS.— 
A  few  concrete  illustrations  may  help  to  bring  out  the 
points  under  discussion.  Suppose  an  agreement  for 
the  sale  of  real  estate,  and,  for  instance,  the  buyer  is 
unable  to  be  on  hand  the  day  the  sale  is  to  be  com- 
pleted, and  the  owner  is  present,  and,  finding  the  buyer 
absent,  immediately  sells  the  land  to  another.  Now  is 
there  any  action  against  the  owner,  or  might  he  justly 
refuse  to  go  on  with  the  contract  because  of  the  mo- 
mentary breach  of  contract?  No,  he  cannot  refuse  to 
go  on  in  the  case  of  a  contract  of  that  sort  to  sell  real 
estate,  unless  the  contract  very  expressly  provided 
that  the  transaction  must  be  carried  through  at  the 
specified  time  and  place  or  not  at  all.  The  case  would 
be  governed  otherwise  by  the  principle  of  materiality 
of  the  breach,  to  which  we  have  alluded.  A  brief  delay 
would  not  be  a  sufficiently  material  breach  to  justify 
the  seller  in  refusing  to  go  on,  but  a  long  delay,  of 
course,  would  be  sufficient.  In  sales  of  personal  prop- 


94  COMMERCIAL    LAW 

erty  time  is  regarded  by  the  law  as  more  important 
than  in  sales  of  land.  In  contracts  to  sell  stocks  vary- 
ing rapidly  in  value,  time  is  a  very  important  element. 
Suppose  now  that  an  option  for  a  piece  of  land  was 
given  by  the  .owner.  May  he  dispose  of  the  land 
to  another  a  few  minutes  after  the  time  specified  in 
the  option  for  the  acceptance  of  the  offer?  That  is 
different  from  the  case  previously  put.  The  option  is 
in  effect  an  offer  to  make  a  sale,  and  the  offer  is  by 
its  terms  to  expire,  we  will  say,  at  12  o'clock,  noon, 
October  23.  It  will  expire  at  that  time,  and  an  accep- 
tance a  minute  later  will  be  too  late.  The  difference 
is  in  the  terms  of  the  promise  made  by  the  different 
parties.  In  the  case  put  first,  there  is  an  unqualified 
contract  to  buy  and  sell.  In  the  case  now  put  there  is 
a  promise  to  sell  only  if  the  price  is  tendered  or  if  ac- 
ceptance is  made  prior  to  12  o'clock,  noon,  October 
23.  The  terms  of  the  option,  assuming  in  its  favor 
that  it  was  given  for  consideration  or  was  under  seal 
and  therefore  not  merely  a  revocable  offer,  were  ex- 
pressly conditional.  The  vital  thing  in  contracts  is  to 
be  sure  of  the  terms  of  your  promise.  The  term  option 
indicates  a  right  v/hich  exists  up  to  a  certain  point; 
beyond  that  point  there  is  no  right. 

PROSPECTIVE  INABILITY  OF  ONE 
PARTY  EXCUSES  THE  OTHER.— There  is  one 
other  thing  besides  actual  breach  by  his  co-contractor, 
which  justifies  one  party  to  a  contract  in  refusing  to 
go  on  with  the  contract,  and  that  may  be  called  pro- 
spective inability  to  perform  on  the  part  of  the  other 
side. 


COMMERCIAL    LAW  95 

INSOLVENCY  OR  BANKRUPTCY.— Let  us 
give  one  or  two  illustrations  of  that.  You  have  entered 
into  a  contract  to  sell  a  merchant  100  barrels  of  flour 
on  thirty  days'  credit.  The  time  has  come  for  the  de- 
livery of  the  flour,  but  the  merchant  is  insolvent.  He 
says  to  you,  "I  want  you  to  deliver  that  flour;  the 
agreed  day  has  come."  You  say,  "But  you  cannot  pay 
for  the  flour."  "Well,"  he  replies,  "it  is  not  time  to 
pay  for  it.  You  agreed  to  give  me  thirty  days'  credit : 
perhaps  I  shall  be  able  to  pay  all  right  then.  I  have 
not  broken  my  promise  yet,  and  as  long  as  I  am  not 
in  default  in  my  promise  you  have  no  right  to  break 
yours."  You  have  a  right  to  refuse  to  deliver  the  flour 
because,  though  the  buyer  has  not  yet  broken  his  con- 
tract, the  prospect  of  his  being  able  to  keep  it,  in  view 
of  his  insolvency,  is  so  slight  that  his  prospective  in- 
ability to  perform  in  the  future,  when  the  time  comes, 
excuses  you  from  going  on  now.  Insolvency  or  bank- 
ruptcy of  one  party  to  a  contract  will  always  excuse 
the  other  party  from  giving  credit  or  going  on  with 
an  executory  contract,  unless  concurrent  performance 
is  made  by  the  insolvent  party  or  security  given  for 
future  performance. 

REPUDIATION.  —  Repudiation  of  a  contract 
by  one  party  is  also  a  good  excuse.  Repudiation  means 
a  wrongful  assertion  by  one  party  to  a  contract  that 
he  is  not  going  to  perform  in  the  future  what  he 
agreed.  After  such  repudiation  the  other  party  may 
say,  "I  am  not  going  to  perform  now  what  I  agreed  to 
perform,  since  you  have  said  you  will  not  perform  in 
the  future  what  you  agreed.    I  shall  not  go  ahead  and 


96  COMMERCIAL   LAW 

trust  you,  even  though  I  did  by  the  contract  agree  to 
give  you  credit,  in  view  of  the  fact  that  you  have  now 
repudiated  your  agreement  by  saying  that  you  are  not 
going  to  do  what  you  agreed."  Repudiation  may  be 
indicated  by  acts  as  well  as  by  words,  and  often  is 
indicated  partly  by  words  and  partly  by  acts. 

TRANSFER  OF  PROPERTY  TO  WHICH 
THE  CONTRACT  RELATES.— Still  another  illu- 
stration of  prospective  inability  arises  where  a  con- 
tract relates  to  specific  property,  as  a  certain  piece 
of  land,  and  before  the  time  for  performance  comes, 
the  owner  of  the  land,  who  had  agreed  to  sell  it  we  will 
suppose,  transfers  it  to  somebody  else  or  mortgages  it. 
The  man  who  had  agreed  to  buy  that  piece  of  land 
may  withdraw  from  the  contract.  He  may  say,  "You 
might  get  the  land  back  at  the  time  you  agreed  to  per- 
form, but  I  am  not  going  to  take  any  chances  on  that. 
I  am  off  the  bargain  altogether." 

IMPORTANCE  OF  EXACT  PROVISIONS 
IN  CONTRACTS.— So  much  for  the  rather  difficult 
subject  of  the  mutual  duties  of  parties  to  a  contract  in 
the  performance  of  it.  The  best  way  to  avoid  doubt 
or  uncertainty  in  such  matters  is  to  provide  very  ex- 
actly in  the  contract  what  the  rights  of  the  parties 
shall  be  in  certain  contingencies.  The  law  always 
respects  the  intention  of  the  parties  when  it  is  mani- 
fested, and  it  is  only  when  they  have  said  nothing 
about  their  intention  that  the  rules  which  we  have  con- 
sidered become  important. 

FRAUD. — The  next  question  in  regard  to  con- 
tracts arises  out  of  certain  grounds  of  defense  that 


COMMERCIAL    LAW  97 

may  come  up  and  the  most  important  of  these  is 
fraud.  Fraud  is  deception;  it  is  inducing  the  other 
party  to  believe  something  which  is  not  true,  and,  by 
inducing  him  to  believe  that,  influencing  his  action. 
The  ordinary  way  in  which  fraud  is  manifested  is 
by  misrepresentations.  A  purchase  or  sale  of  stock 
or  of  goods  may  be  induced  by  fraud.  A  loan  may  be 
obtained  from  a  bank  by  fraud,  that  is,  by  misrepre- 
sentation of  material  facts  which  influence  the  other 
side  to  act. 

MISSTATEMENTS  OF  OPINION  ARE  NOT 
FRAUDULENT. — Now  what  kind  of  misrepresenta- 
tion amounts  to  fraud?  There  must  be  misrepre- 
sentation of  a  fact.  Merely  misrepresentation  of 
opinion  is  insufficient  and  what  is  opinion  and  what  is 
fact  has  been  the  basis  of  a  good  many  lawsuits.  John 
offers  his  horse  to  James  for  sale  at  $300.  He  says  that 
it  is  the  best  horse  in  town.  Well,  it  is  not  the  best 
horse  in  town  by  a  good  deal,  but  that  sort  of  state- 
ment cannot  be  the  basis  of  an  allegation  of  fraud. 
That  a  thing  is  "good,"  or  "the  best  in  the  market,"  or 
similar  general  statements,  all  of  which  ought  to  be 
known  to  the  hearer  to  be  simply  expressions  of 
opinion,  are  not  statements  of  positive  fact.  Take 
these  two  statements  in  regard  to  the  horse.  "He  can 
trot  very  fast."  That  is  a  mere  statement  of  opinion. 
To  some  minds  eight  miles  an  hour  is  very  fast;  to 
more  enterprising  persons  fifteen  miles  an  hour  is 
necessary  in  order  to  make  travel  seem  fast.  Those 
are  matters  of  opinion.  But  a  statement  that  the  horse 
can  trot  twelve  miles  an  hour,  or  has  trotted  one  mile 


98  COMMERCIAL   LAW 

in  three  minutes  on  the  track,  are  statements  of  fact, 
and  if  untrue  are  fraudulent.  A  statement  of  value  is 
a  statement  of  opinion  and  cannot  be  the  basis  of 
fraud.  A  statement  that  the  horse  is  worth  $300,  or  is 
worth  twice  as  much  as  the  owner  is  asking  for  him, 
cannot  be  relied  upon;  but  a  statement  that  $300  was 
paid  for  this  horse,  or  was  offered  for  him,  is  an  asser- 
tion of  fact,  and  if  untrue  would  be  the  basis  of  an 
allegation  of  fraud. 

PROMISES  ARE  NOT  FRAUDULENT  BE- 
CAUSE BROKEN. — A  promise  is  not  a  statement  of 
fact.  A  man  may  promise  to  do  something  and  fail  to 
carry  out  the  promise,  and  in  consequence  the  person 
he  was  dealing  with  may  regret  the  bargain  he  en- 
tered into,  but  his  only  remedy  is  to  sue  for  dam- 
ages for  breach  of  the  promise  if  it  was  part  of  a 
contract.  He  cannot  assert  that  merely  because  the 
promise  was  not  kept  the  transaction  was  fraudulent. 
But  if  a  man  makes  a  promise  knowing  when  he  makes 
it  that  he  cannot  keep  it,  he  is  committing  a  fraud. 
The  commonest  illustration  of  this  is  where  a  man 
buys  goods  on  credit,  having  at  the  time  an  intention 
not  to  pay  for  them,  or  well  knowing  that  he  cannot 
pay  for  them. 

STATEMENTS  MUST  HAVE  BEEN  CAL- 
CULATED TO  INDUCE  ACTION.— Generally 
speaking,  the  statement  relied  on  as  fraudulent  must 
have  been  made  with  the  purpose  of  inducing  action. 
For  instance,  suppose  John  likes  to  tell  large  stories. 
He  tells  James  things  about  his  neighbor's  horse. 
John  does  not  do  this  for  any  purpose  except  to  brag 


COMMERCIAL    LAW  99 

about  living  near  a  man  who  has  such  a  splendid 
horse,  but  James  suddenly  takes  the  notion  he  would 
like  to  have  that  horse  and  he  goes  and  buys  it.  Now 
it  was  not  legal  fraud  on  John's  part  to  tell  those 
lies  about  the  horse,  even  though  they  did  induce 
James  to  go  and  buy  it,  unless  John,  as  a  reasonable 
man,  ought  to  have  known  that  James  was  likely  to 
buy  the  horse,  as  might  have  been  the  case  if  James 
had  been  talking  about  buying  him.  Then  it  would 
be  fraud,  and  it  would  not  make  any  difference  in 
regard  to  its  being  fraudulent  that  John  had  nothing 
to  gain  by  telling  these  lies,  that  he  was  simply  doing 
it  for  the  fun  of  the  thing. 

REMEDIES  FOR  FRAUD.— What  remedy 
has  the  defrauded  person?  The  law  gives  him  two 
rem.edies  of  which  he  may  take  his  choice;  he  can- 
not have  both,  but  he  can  have  either.  One  is  to  sue 
the  fraudulent  person  for  such  damages  as  have  been 
suffered,  and  the  other  is  to  rescind  the  transaction, 
to  get  back  what  has  been  given,  or  to  refuse  to  go  on 
with  the  contract  at  all  if  it  is  still  wholly  executory. 

DURESS  AND  UNDUE  INFLUENCE.— 
There  are  certain  defences  similar  to  fraud ;  duress,  or 
undue  influence,  is  one  of  them.  However,  this  is 
comparatively  rare.  It  is  compelling  a  person  to  do 
what  he  does  not  want  to  do,  making  him  agree  to  a 
bargain  that  he  would  not  agree  to  accept  under  com- 
pulsion, as  by  fear  of  personal  violence  or  imprison- 
ment; and  a  bargain  made  under  these  circumstances 
can  be  rescinded  or  set  aside.  Merely  threatening  to 
enforce  your  legal  rights  by  suit  against  another  is  not 


100  COMMERCIAL    LAW 

duress,  though  it  may  in  fact  induce  him  to  agree  to 
what  he  would  not  otherwise  have  agreed;  but  to 
threaten  criminal  prosecution  as  a  means  of  extorting 
money  or  inducing  an  agreement  is  illegal  and  in  many 
jurisdictions  is  itself  a  crime. 

MISTAKE  OF  FACT.— In  certain  cases,  also, 
a  mutual  mistake  of  a  vital  fact  is  ground  for  setting 
aside  a  contract,  but  these  cases  are  not  very  com- 
mon. Mistakes  generally  do  not  prevent  the  enforce- 
ment of  contracts.  Usually  where  there  is  a  mistake, 
it  is  of  a  character  for  which  one  party  or  the  other 
is  to  blame.  If  the  mistake  arises  out  of  deception 
it  is  fraud.  If  the  mistake  arises  simply  because  the 
mistaken  party  has  failed  to  inform  himself  of  the 
facts,  as  he  might  have  done,  then  it  is  no  defence  at 
all.  But  if  both  parties  were  acting  under  the  mutual 
assumption  that  some  vital  fact  was  true  in  making 
a  bargain,  either  one  of  them  may  avoid  or  rescind 
the  bargain  when  it  appears  they  were  both  mistaken. 

IMPOSSIBILITY.— Impossibility  is  sometimes 
a  defence  to  the  performance  of  a  contract.  Perhaps 
the  simplest  illustration  of  this  arises  in  a  contract 
for  personal  services  of  any  kind.  Illness  or  death 
of  the  person  who  promises  the  services  excuses  per- 
formance. Death  does  not  usually  terminate  a  con- 
tract or  serve  as  a  defence  to  it.  If  a  man  contracts 
to  sell  100  bushels  of  grain  and  dies  the  next  day  his 
estate  is  liable  on  the  contract  just  as  if  he  continued 
alive;  but  if  he  agreed  to  hire  a  man  as  an  employee 
for  a  year,  his  death  or  the  employee's  death  within 
the  year  would  terminate  the  obligation  of  both.    Un- 


COMMERCIAL    LAW  101 

expected  difficulty  is  not  impossibility.  For  instance, 
take  a  building  contract :  the  builder  agrees  to  put  up 
a  building  within  a  certain  time;  he  is  prevented  by 
strikes.  Nevertheless,  he  is  liable  for  not  doing  as 
he  agreed.  He  should  have  put  a  condition  in  his 
promise,  qualifying  his  agreement  to  build,  that  if 
strikes  prevented,  he  would  not  be  liable.  So,  if  the 
foundation  gave  way  and  the  building  tumbled  down 
before  it  was  finished,  the  builder  must  put  it  up  again. 
Also,  if  lightning  struck  it,  he  must  put  it  up  again. 

ILLEGAL  CONTRACTS.— One  other  matter 
to  be  considered  in  connection  with  contracts  and 
defences  to  them  is  illegality.  Some  kinds  of  illegal 
contracts  are  so  obviously  illegal  that  it  is  not  neces- 
sary to  say  anything  about  them.  Anybody  would 
know  that  they  were  illegal  and  that  they  could  not 
be  enforced  for  that  reason.  A  contract  to  steal  or 
murder  or  take  part  in  any  crime  is  a  good  example. 
But  other  kinds  of  illegal  contracts  are  not  so  ob- 
viously wicked  as  to  make  it  clear  that  they  are  unen- 
forceable. It  may  be  worth  while  to  mention  a  few 
of  these  kinds  of  illegality. 

CONTRACTS  IN  RESTRAINT  OF  TRADE. 
— One  class  of  contracts  which  has  become  very  im- 
portant in  late  years  in  business  is  the  contract  in 
restraint  of  trade,  so  called.  The  original  contracts 
in  restraint  of  trade  were  contracts  by  which  one 
man  agreed  that  he  would  not  thereafter  exercise  his 
trade  or  profession,  the  object  generally  being  that 
the  promisee  should  be  freed  from  the  competition 
of  the  man  who  had  promised  to  refrain  from  exercis- 


102  COMMERCIAL    LAW 

ing  his  trade;  and  the  law  became  settled  a  good 
many  years  ago  that  if  the  promise  was  general  not  to 
exercise  the  trade  or  profession  anywhere,  or  at  any 
time,  it  was  illegal,  but  that  if  it  was  only  for  a  reason- 
ably limited  space  of  time  it  would  not  be  illegal. 
That  old  law  still  exists,  but  there  has  grown  up 
further  a  much  more  important  class  of  cases  where 
contracts  are  made  to  further  an  attempted  monop- 
oly, and  one  may  say  pretty  broadly  that  all  such  at- 
tempts are  illegal.  It  does  not  matter  how  much 
business  reason  there  is  for  it ;  any  attempt  to  combine 
in  order  to  get  a  monopoly,  or  in  order  to  put  up  prices, 
is  bad.  Moreover,  if  the  attempted  restraint  of  trade  or 
monopoly  concerns  interstate  commerce,  the  agree- 
ment is  a  Federal  crime  under  the  Sherman  law. 

GAMBLING  CONTRACTS.— Another  kind  of 
illegal  contract  is  a  gambling  contract.  This  seems 
obvious  in  agreements  for  the  more  extreme  kinds  of 
gambling,  but  in  certain  business  transactions  where 
the  matter  becomes  important,  the  dividing  line  is  not 
so  clear;  especially  in  dealings  on  stock  exchanges  and 
exchanges  for  sales  of  staple  products,  such  as  grain, 
cotton  and  coffee.  The  stock  exchanges  and  other 
exchanges  are  made  the  means  of  a  great  deal  of 
speculation,  which  is  virtually  gambling.  Now,  in 
what  cases  does  the  law  regard  these  transactions  as 
gambling  and,  therefore  unenforceable,  and  in  what 
cases  are  they  legal?  The  answer  is,  if  an  actual  deliv- 
ery of  the  stock,  or  commodity  bought,  is  contem- 
plated, then  the  transaction  is  not  gambling  in  the 
legal  sense ;  but  if  a  settlement  merely  of  the  differences 


COMMERCIAL    LAW  103 

in  buying  and  selling  prices  is  contemplated,  as  the 
only  performance  of  the  bargain,  then  the  transaction 
is  gambling.  The  difference  is  between  a  stock-ex- 
change business  and  a  bucket-shop  business.  If  you 
give  an  order  to  a  stock-exchange  house  to  buy  stock, 
even  though  you  put  up  but  a  small  margin  and  could 
put  up  but  a  small  margin,  and  the  stock-exchange 
house  knows  you  could  put  up  but  a  small  margin, 
nevertheless,  the  stock-exchange  house  actually  buys 
that  stock,  and  it  is  delivered  to  it.  The  stock-ex- 
change house  would  then  have  a  right  to  demand  of 
you  that  you  pay  for  that  stock  in  full  and  take  de- 
livery of  it,  and  could  sue  you  for  the  price  if  you  failed 
to  comply  with  the  demand.  However,  as  a  matter 
of  fact,  it  does  not  ordinarily  do  that.  If  it  wants  to 
get  the  price  which  you  promised  to  pay,  and  you 
fail  on  demand  to  take  up  the  stock,  it  sells  the  stock 
which  it  has  been  holding  as  security.  The  bucket- 
shop,  on  the  other  hand,  though  it  takes  your  order 
to  buy,  does  not  actually  buy  the  stock;  it  simply 
settles  with  you  when  you  want  to  settle,  or  when  it 
wants  to  settle,  because  the  margin  is  not  sufficiently 
kept  good,  by  calculating  the  difference  between  the 
price  at  which  the  stock  was  supposedly  bought  and 
the  price  at  which  it  is  supposedly  sold,  those  prices 
being  fixed  by  the  ruling  market  quotations  at  the 
time.  It  would  be  perfectly  possible  to  make  a  gam- 
bling transaction  out  of  the  stock-exchange  transac- 
tion by  a  very  slight  change.  If  a  stock-exchange 
house  should  agree,  for  instance,  that  the  customer 
should  not  be  compelled  to  take  delivery  of  the  stock. 


104  COMMERCIAL    LAW 

then  that  added  agreement  would  make  the  transac- 
tion between  broker  and  customer  a  gambling  transac- 
tion, even  though  the  broker  actually  bought  the  stock 
on  the  exchange,  and,  as  between  himself  and  the 
other  broker  on  the  exchange  with  whom  he  dealt, 
there  was  a  perfectly  valid  sale  of  the  stock.  In  some 
jurisdictions,  by  statute,  speculative  contracts  which 
are  not  gambling  contracts  at  common  law  are  made 
illegal. 

BREACH  OF  FIDUCIARY  DUTIES.— An- 
other very  important  class  of  illegal  transactions 
arises  from  breach  of  fiduciary  duties.  A  fiduciary 
is  rather  hard  to  define.  He  is  somebody  that  owes 
a  duty  higher  than  a  mere  contractual  obligation,  a 
duty  involving  something  of  trust  and  confidence.  A 
trustee  is  a  fiduciary,  so  is  an  agent.  A  director  or 
officer  of  a  corporation  is  a  fiduciary,  and  any  dealing 
in  which  a  fiduciary  violates  his  duty  to  the  person 
for  whom  he  is  fiduciary  is  illegal,  and  any  agreement 
for  such  a  violation  is  an  illegal  contract.  It  is  illegal 
for  a  trustee  to  bargain  for  any  advantage  from  his 
trust  other  than  his  regular  compensation.  It  would 
be  illegal  for  a  trustee  to  bargain  with  a  bank  to  give 
the  bank  a  trust  account  in  return  for  some  personal 
advantage,  as  a  loan  to  be  made  to  the  trustee  per- 
sonally. It  would  be  a  breach  of  fiduciary  duty  for  a 
corporation  officer  and  director  to  bargain  for  any  per- 
sonal advantage  by  virtue  of  his  official  action. 

KNOWLEDGE  OF  ANOTHER'S  ILLEGAL 
PURPOSE.-— The  knowledge  of  another's  illegal 
purpose  will  not  make  the  person  who  knows  of  it 


COMMERCIAL    LAW  105 

himself  guilty  of  illegality ;  but  if  one  not  only  knows 
but  in  any  way  promotes  the  illegal  purpose  of  an- 
other, he  will  be  considered  a  party  to  the  illegality. 
A  may  sell  goods  to  B,  knowing  that  B  is  going  to 
use  them  illegally,  and  A's  sale  will  not  be  illegal; 
but  if  A  does  anything  to  help  B  in  using  them  il- 
legally, or  if  the  goods  are  of  such  a  character  that 
they  can  be  used  only  illegally,  then  A  would  be 
guilty  of  illegality  himself. 

MEANING  OF  ASSIGNMENTS.— Much  of 
the  difficulty  regarding  assignment  of  contracts  is 
due  to  different  meanings  which  may  be  attached  to 
the  word  assignment.  When  property  is  assigned 
the  assignee  becomes  the  owner  in  every  sense,  if  the 
person  from  whom  he  took  the  assignment  had  a  valid 
title.  This  is  not  true  of  the  assignment  of  contracts. 
By  the  common  law,  contract  rights  or  "choses  in 
action,"  as  they  are  termed  in  law,  were  not  assign- 
able, the  reason  being  that  one  who  contracted  with 
A,  cannot  without  his  consent  become  bound  to  B. 

POWER  OF  ATTORNEY  TO  COLLECT  A 
CLAIM. — Though  when  a  man  had  a  contract  right 
he  could  not  by  common  law  make  B  in  a  complete 
sense  the  owner  of  the  claim,  he  could  give  B  a  power 
to  collect  the  claim  as  his,  A's,  agent,  and  authorize 
him  to  keep  the  proceeds  when  the  claim  was  col- 
lected. It  long  ago  became  established  that  when  an 
owner  of  a  claim  purported  to  make  an  assignment  of 
a  claim  he  thereby  gave  the  assignee  the  power  to  en- 
force the  claim  in  his  stead,  and  this  power  given  the 
assignee  is  irrevocable. 


106  COMMERCIAL    LAW 

EFFECT  OF  ASSIGNMENT  OF  RIGHTS.— 
It  may  be  supposed  that  the  effect  of  an  assignment 
of  a  right,  though  the  result  may  be  worked  out  by 
treating  the  assignee  as  an  agent  or  attorney  of  the 
assignor,  is  the  same  as  if  the  assignee  were  fully 
substituted  in  the  position  of  the  assignor  as  owner 
of  the  claim,  but  this  is  not  quite  true.  Assum- 
ing that  the  claim  is  not  represented  by  negotiable 
paper,  the  legal  owner  of  the  claim  is  still  the  as- 
signor. This  is  shown  by  the  fact  that  if  the  debtor 
pays  the  assignor  in  ignorance  of  the  assignment,  the 
debt  is  discharged  and  the  assignee  can  only  go 
against  his  assignor  for  the  latter's  fraudulent  con- 
duct in  collecting  the  claim  after  having  assigned  it. 
So,  too,  if  the  assignor  makes  a  subsequent  assign- 
ment, this  subsequent  assignee  also  has  a  power  of 
attorney  to  collect  the  claim  and  keep  the  proceeds; 
so  that  if  the  second  assignee  in  good  faith  collects 
the  claim  in  ignorance  of  the  prior  assignment,  he 
can  keep  what  he  has  collected;  nor  is  the  debtor 
liable  to  the  first  assignee  who  must  as  before  seek 
redress  from  his  assignor.  It  is,  therefore,  always 
important  for  the  assignee  of  a  non-negotiable  chose 
in  action  to  give  immediate  notice  of  his  assignment 
to  the  debtor.  If  after  such  notice  the  debtor  should 
pay  the  assignor  or  a  subsequent  assignee,  such  pay- 
ment would  not  discharge  the  debtor,  and  the  first 
assignee  could  collect  the  claim  from  him. 

NON-ASSIGNABLE  RIGHTS.— Rights  can- 
not be  assigned  which  are  personal  in  their  nature. 
The  one  who  has  contracted  to  paint  a  picture  can- 


COMMERCIAL    LAW  107 

not  delegate  the  duty  to  another,  no  matter  how 
skillful.  One  who  has  a  right  to  the  personal  services 
of  an  employee  cannot  assign  that  right  to  another. 
A  publisher  who  has  a  right  to  publish  all  books  writ- 
ten by  a  certain  author  cannot  assign  his  right  to 
another  publisher. 

ASSIGNMENT  OF  DUTIES.— The  duties  un- 
der a  contract  are  not  assignable  under  any  circum- 
stances. That  is,  one  who  owes  money  or  is  bound 
to  any  performance  can  not  by  any  act  of  his  own  or 
by  any  act  in  agreement  with  any  other  person  except 
his  creditor,  divest  himself  of  liability  and  substitute 
the  liability  of  another.  This  is  sufficiently  obvious 
when  attention  is  called  to  it;  for  otherwise  debtors 
would  find  an  easy  practical  way  of  escaping  from 
their  debts  by  assigning  the  duty  to  pay  to  irrespon- 
sible persons.  But  the  principle  is  not  always  re- 
cognized. A  person  who  is  subject  to  a  duty,  though 
he  cannot  escape  liability,  may  delegate  the  perform- 
ance of  his  obligation  provided  the  duty  is  of  such 
a  character  that  performance  by  an  agent  will  be  sub- 
stantially the  same  thing  as  performance  by  the  obli- 
gor himself.  Thus  if  a  contractor  engages  to  build  a 
house,  he  may  delegate  the  actual  building  to  another, 
but  he  cannot  escape  responsibility  for  the  work.  One 
who  owes  a  mortgage  may  delegate  the  payment  of 
the  mortgage  to  a  purchaser  of  the  land  who  assumes 
and  agrees  to  pay  the  debt.  If  the  purchaser  of  the 
land  actually  pays,  the  debt  is  discharged;  but  if  he 
fails  to  do  so,  the  mortgagee  may  sue  the  original 
mortgagor  and  the  latter  will  be  obliged  to  bring 


108  COMMERCIAL   LAW 

another  action  against  the  purchaser  who  promised 
to  pay  the  debt  and  failed  to  do  so.  So  where  a  part- 
nership is  changed  and  a  new  firm  formed,  it  is  very 
common  for  the  new  firm  to  assume  the  obligations  of 
the  old  firm. 

ORIGINAL  DEBTOR  NOT  DISCHARGED 
UNLESS  THERE  IS  A  NOVATION.— Though  a 
creditor  cannot  be  deprived  of  his  right  against  his 
original  debtor  without  his  consent,  he  may  consent. 
If  he  does  thus  consent  to  take  in  lieu  of  the  obligation 
of  his  orginal  debtor  that  of  the  person  who  assumed 
the  debt,  what  is  called  a  novation  is  created.  That 
frequently  happens  where  a  new  firm  succeeds  an 
old  one.  The  new  firm  goes  on  dealing  with  the  old 
creditors,  and  they  impliedly,  if  not  expressly,  assent 
to  taking  the  new  firm  instead  of  the  old  firm  as  a 
debtor.  But  in  order  to  make  out  a  novation  you  have 
got  to  fi_nd  as  a  fact  that  the  creditor  agreed  to  give 
up  his  right  against  the  old  debtor.  If  the  creditor 
does  not  assent  to  a  novation  then  the  situation  is 
that  the  creditor  retains  his  claim  against  the  old 
debtor,  but  the  person  who  has  assumed  the  debt  has 
contracted  to  pay  that  debt.  If  he  keeps  his  contract 
he  will  pay  it  and  the  debt  will  be  cancelled.  If  he 
does  not  keep  his  contract  the  creditor  will  sue  the 
original  debtor  and  the  original  debtor  will  sue  the 
man  who  assumed  the  debt. 

ASSIGNMENT  OF  BILATERAL  CON- 
TRACTS. — In  bilateral  contracts  each  party  is  un- 
der a  duty  to  perform  his  promise,  and  also  has  a 
right  to  the  performance  of  the  other  party.    If  an 


COMMERCIAL    LAW  109 

attempt  is  made  to  assign  such  a  contract  the  effect 
is  this :  the  assignor  delegates  to  the  assignee  the  duty 
of  performing  the  assignor's  promise,  but  the  assignor 
himself  still  remains  liable  if  his  agent,  the  assignee, 
fails  to  carry  out  the  duty.  Further,  the  assignor 
authorizes  the  assignee  to  receive  the  payment  or  per- 
formance due  from  the  other  party  to  the  contract 
and  to  keep  it  for  himself. 

WHAT  AMOUNTS  TO  AN  ASSIGNMENT.— 
No  particular  words  are  necessary  to  constitute  an 
assignment.  Any  words  which  show  an  intention 
that  another  shall  be  the  owner  of  a  right  are  sufficient 
to  constitute  the  latter  an  assignee.  Especially  it 
should  be  observed  that  an  order  directed  to  a  debtor 
of  the  drawer  ordering  him  to  pay  the  debt  to  a  named 
payee,  is  an  assignment  of  the  debt  when  delivered  to 
the  payee.  This  case  must  be  sharply  distinguished 
from  a  bill  of  exchange  or  check.  A  bill  of  exchange 
or  check  is  an  order  to  pay  a  certain  amount  uncondi- 
tionally, irrespective  of  the  existence  of  any  particu- 
lar fund.  It  is  only  an  order  to  pay  from  a  particular 
fund,  that  is,  an  order  which  is  conditional  expressly 
or  impliedly  on  the  existence  of  that  fund,  which  con- 
stitutes an  assignment. 

PARTIAL  ASSIGNMENT.— A  creditor  may 
not  only  assign  his  whole  claim  to  an  assignee,  but 
he  may  assign  part  of  it.  Such  a  partial  assignment 
authorizes  the  assignee  to  collect  the  portion  of  the 
claim  assigned  and  keep  it  for  himself.  But  the  debtor 
is  not  bound  to  pay  the  claim  piecemeal ;  he  may  insist 
on  making  but  a  single  payment  unless  his  contract 


110  COMMERCIAL    LAW 

with  his  creditor  provides  otherwise.  A  bank  in  ac- 
cepting a  deposit  contracts  to  pay  that  deposit  in 
such  amounts  as  the  depositor  may  indicate  on  the 
checks  drawn  by  him,  but  an  ordinary  debtor  who 
owes  $100  cannot  be  required  to  pay  in  such  amounts 
as  his  creditor  may  see  fit  to  demand.  For  this  reason 
a  few  courts  hold  that  even  if  the  debtor  has  notice 
of  a  partial  assignment,  he  may  pay  the  whole  debt  to 
the  original  creditor  though  that  results  in  defraud- 
ing the  partial  assignee.  Most  courts  hold,  however, 
that  the  debtor  when  notified  of  the  facts  cannot  do 
this,  and  if  he  objects  to  paying  fractional  parts  of  his 
indebtedness  he  must  pay  the  whole  sum  into  court 
to  be  distributed  by  it  among  the  parties  entitled.  So, 
on  a  question  of  this  character,  the  local  statute 
should  be  examined. 

ASSIGNMENT  OF  FUTURE  CLAIMS.— 
Assignments  of  future  claims,  as  well  as  of  existing 
claims,  may  be  made,  but  there  are  in  many  States 
some  special  provisions  of  statute  law  in  regard  to 
assigning  future  wages.  Such  assignments  must 
often  be  recorded,  and  there  are  certain  other  special 
statutory  provisions  in  regard  to  them.  The  assign- 
ment of  future  debts  is  also  subject  to  this  qualifica- 
tion: The  law  does  not  allow  the  assignment  of  a 
future  claim  unless  the  contract  or  employment  out 
of  which  the  claim  is  expected  to  arise  has  already 
been  made  or  is  already  in  existence. 

DISCHARGE  OF  CONTRACTS.— Contracts 
are  discharged  in  much  the  same  way  as  they  are 
made.  The  simplest  way  of  discharging  a  contract  is 


COMMERCIAL    LAW  HI 

by  performing  it.  When  both  parties  do  exactly  what 
they  agreed  to  do  the  contract  is  discharged  by  per- 
formance. Where  seals  still  retain  their  common  law 
effect,  it  may  be  discharged  without  performance  by 
agreement  under  seal  that  it  shall  be  discharged,  just 
as  a  contract  may  be  made  by  an  agreement  under 
seal.  The  agreement  under  seal  to  discharge  a  con- 
tract is  called  a  release.  You  may  release  any  right 
that  you  have — a  right  for  money,  a  right  to  have 
work  done  or  any  right.  Just  as  contracts  may  be 
made  either  under  seal  or  by  an  agreement  with  con- 
sideration, so  they  may  be  discharged  not  only  by  a 
release  under  seal  but  by  an  agreement  for  rescission 
of  the  contract.  But  this  agreement  must  have  con- 
sideration. 

ILLUSTRATIONS.— Suppose  A  has  promised 
to  build  a  house  and  B  has  promised  to  pay  $10,000 
for  it.  Before  anything  has  been  done,  A  and  B  agree 
to  call  that  contract  off.  This  is  a  valid  agreement  for 
rescission,  because  each  party  agrees  to  give  up  some- 
thing— one  party  to  give  up  his  right  to  have  the  house 
built,  the  other  party  to  give  up  the  right  to  get 
$10,000  pay.  So  an  agreement  between  employer  and 
employee  that  a  contract  shall  be  terminated  before 
the  time  originally  agreed  has  sufficient  considera- 
tion— the  employer  gives  up  his  right  to  the  em- 
ployee's services,  the  employee  gives  up  his  right  for 
future  pay.  But  compare  with  these  this  case :  A  owes 
B  a  thousand  dollars;  it  is  simply  a  debt.  A  and  B 
agree  to  call  that  square.  That  agreement  is  of  no 
validity,  for  here  only  one  party  agrees  to  give  up 


112  COMMERCIAL    LAW 

anything.  The  creditor  agrees  to  give  up  his  thousand 
dollars,  and  he  does  not  get  any  promised  amount  in 
return  for  it.  But  that  obligation,  that  debt,  could  be 
satisfied  if  valid  consideration  were  given  for  the  sur- 
render of  the  claim;  and  anything  agreed  upon,  as  a 
horse,  or  ten  shares  of  stock,  or  anything  else  the 
parties  agreed  to,  would  be  good  consideration  for 
the  agreement  to  surrender  the  claim,  so  long  as  one 
did  not  get  into  the  difficulty  alluded  to  under  the 
heading  of  consideration,  of  trying  to  surrender  a 
right  to  a  larger  liquidated  sum  in  consideration  of  the 
payment  of  a  smaller  sum  of  money. 

SENDING  A  CHECK  AS  FULL  PAYMENT. 
— It  is  very  common  for  a  debtor  in  making  payment 
by  check  of  his  debt  to  seek  to  make  the  check  operate 
as  a  receipt  in  full  of  all  claims  by  the  creditor  against 
him.  He  may  do  this  by  writing  on  the  check  itself 
that  it  is  "in  full  of  all  demands"  or  "in  full  payment" 
of  a  certain  bill ;  or  he  may  by  a  letter  accompanying 
the  check  state  that  the  check  is  sent  as  full  satisfac- 
tion. The  acceptance  by  the  creditor  of  the  check 
under  either  of  these  circumstances  is  an  assent  by 
him  to  the  proposition  stated  on  the  check  or  in  the 
accompanying  letter,  that  the  check  is  in  full  pay- 
ment. Such  an  assent,  however,  does  not  necessarily 
prove  that  the  debtor  is  discharged;  consideration  as 
well  as  mutual  assent  is  essential  to  the  validity  of 
any  agreement  which  is  not  under  seal.  Accordingly 
if  the  debt  was  a  liquidated  and  undisputed  one,  and 
the  check  was  for  less  than  the  amount  due,  the  agree- 
ment of  the  creditor  to  take  it  in  full  satisfaction  is 


COMMERCIAL    LAW  113 

not  supported  by  sufficient  consideration  under  prin- 
ciples previously  considered.  On  the  other  hand,  if 
the  debt  was  an  unliquidated  one,  or  there  was  an 
honest  dispute  in  regard  to  the  amount  due,  the  cred- 
itor's claim  is  fully  satisfied. 

RECEIPT  IN  FULL.— It  may  be  said  gener- 
ally that  though  a  receipt  in  full  is  often  thought  by 
business  men  to  be  a  discharge  irrespective  of  consid- 
eration, like  a  release;  this  is  not  true  in  most  States. 
A  receipt  in  full  is  good  evidence,  if  payment  has  been 
made  in  full,  that  it  has  been  so  made ;  but  where  pay- 
ment has  not  been  made  in  full  a  receipt  will  not  be 
effectual  without  consideration,  as  a  release  under  seal 
would  be. 

RENUNCIATION  OF  OBLIGATION  ON 
NEGOTIABLE  INSTRUMENT.— There  is  one 
case  where  the  law  allows  a  party  who  has  a  right  to 
surrender  it  without  consideration.  This  is  by  virtue 
of  the  Negotiable  Instruments  Law,  which  provides 
that  the  holder  of  a  note  may  discharge  any  party  to  it 
by  a  written  renunciation  of  his  claim.  No  particular 
form  of  words  is  necessary,  but  the  renunciation  must 
be  in  writing.     No  consideration  is  necessary. 

ALTERATION  OF  WRITTEN  CONTRACTS. 
— The  alteration  of  a  written  contract  in  a  material 
particular  with  fraudulent  intent  by  a  promisee  in  effect 
discharges  the  contract  so  far  as  he  is  concerned.  He 
cannot  enforce  it  either  in  its  original  form  or  its 
altered  form,  though  the  other  party  to  the  contract 
may  enforce  it  against  him.  If  the  alteration  is  not 
material,  the  contract  may  be  enforced  even  by  the 


114  COMMERCIAL    LAW 

party  who  altered  it  whatever  the  motive  of  the  alter- 
ation may  have  been.  If  the  alteration  is  material  but 
not  fraudulently  intended,  that  party  is  generally  al- 
lowed to  enforce  the  contract  in  its  original  form.  No 
alteration  by  a  third  person  affects  the  rights  of  a 
party  to  a  contract.  By  material  alteration  is  meant 
one  which  if  given  effect  would  alter  the  legal  obliga- 
tions of  the  parties  to  the  contract.  The  rule  of  the 
Negotiable  Instruments  Law  in  regard  to  alteration 
of  negotiable  instruments,  it  should  be  observed,  is 
somewhat  more  severe  than  that  generally  prevailing 
in  regard  to  other  contracts. 

SUGGESTIONS  FOR  DRAFTING  CON- 
TRACTS.— While  it  is  unwise  to  attempt  the  drafting 
of  any  contract  at  all  complicated,  without  the  ser- 
vices of  an  attorney,  there  are  certain  times  when  it 
may  be  necessary  to  act  suddenly,  and  a  few  funda- 
mental facts  should  be  kept  in  mind.  If  you  are  called 
upon  to  draft  a  contract  for  two  other  people,  the  first 
requisite  is  to  obtain  as  full  information  as  possible 
from  both  parties  as  to  the  plans  they  have  in  mind. 
After  obtaining  this,  the  details  should  be  arranged 
in  writing,  gone  over  carefully  by  the  draftsman,  and 
submitted  to  the  parties  for  their  approval.  A  most 
common  mistake  made  by  laymen  is  to  fail  to  cover 
contingencies  which  are  more  or  less  likely  to  happen. 
For  example,  what  effect  would  the  death  of  either 
party  have  on  the  contract?  This  should  be  provided 
for.  The  careful  draftsman,  whether  he  be  a  layman 
or  a  lawyer,  should  draw  contracts  with  the  idea  of 
making  them  so  plain  that  litigation  will  not  result. 


COMMERCIAL    LAW  115 

Contracts  should  alv^^ays  be  drawn  in  duplicate,  so 
that  each  party  may  have  a  copy,  and  it  is  well,  if 
you  are  the  draftsman,  to  keep  a  copy  for  yourself.  It 
is  not  necessary  to  appear  before  a  notary  public  un- 
less you  are  dealing  with  a  deed,  or  a  similar  formal 
document.  If  there  is  good  consideration  for  the  con- 
tract, no  seal  is  necessary,  but  under  some  statutes,  a 
sealed  contract  is  good  for  a  longer  period  of  time,  so 
that  there  is  an  added  advantage  in  having  the  con- 
tract under  seal. 

QUASI  CONTRACTS.— The  term  quasi  con- 
tract is  one  which  has  appeared  within  the  last  thirty 
years.  The  law  in  this  branch  of  contracts  is  still  in 
the  process  of  development  and  the  field  of  quasi  con- 
tracts is  still  not  one  of  settled  limits.  For  our  pur- 
poses we  confine  ourselves  to  those  obligations  arising 
from  "unjust  enrichment,"  that  is,  the  receipt  by  one 
person  from  another  of  a  benefit,  the  retention  of 
which  is  unjust.  The  term  "enrichment"  has  recently 
been  criticized  by  one  of  the  ablest  writers  on  this 
topic,  as  there  are  many  cases  where  it  is  sufficient  to 
show  that  the  defendant  has  received  something  which 
he  desired,although  the  question  whether  he  is  thereby 
enriched,  is  immaterial.  In  Vickery  v.  Ritchie,  202 
Mass.  247,  we  find  that  where  A  renders  services,  and 
furnishes  materials  and  supplies  for  the  erection  of  a 
building  for  B  under  a  supposed  contract  and  the  con- 
tract itself  is  invalid,  B  is  under  a  supposed  quasi  con- 
tractual obligation  to  pay  A  for  the  services  he  has 
rendered  and  the  material  he  has  furnished,  regardless 
of  whether  B's  property  is  increased  in  value.    We 


l^ 


// 


116  COMMERCIAL   LAW 

may  state  the  point  to  be  emphasized  in  quasi  contract 
is  the  fact  that  the  retention  of  the  benefit  received  by 
the  defendant  would  be  unjust  rather  than  "enrich- 
ment." 

DISTINGUISHING  CHARACTERISTICS.— 
There  are  four  characteristics  which  distinguish  quasi- 
contracts:  1.  The  obligations  of  quasi  contracts  are  im- 
posed by  law  without  reference  to  the  assent  of  the 
obligor.  2.  They  are  imposed  because  of  a  special 
state  of  facts  and  in  favor  of  a  particular  person  and  do 
not  rest  upon  one  at  all  times  and  in  favor  of  all  per- 
sons. 3.  Although  equitable  in  their  origin  they  are 
enforced  by  a  common  law  court.  4.  They  require 
that  the  obligee  shall  be  compensated  for  the  benefit 
which  he  has  conferred  upon  the  obligor  and  not  for 
any  loss  suffered  by  the  obligee. 

APPLICATION  OF  THE  PRINCIPLE.— The 
following  are  the  more  common  illustrations  of  the 
application  of  the  principles  of  quasi  contracts. 
Where  there  has  been  a  mistake,  and  hence  the  minds 
of  the  parties  never  really  met,  yet  benefit  has  really 
been  conferred ;  or,  where  the  attempted  contract  can- 
not be  enforced  as  a  contract,  because  it  did  not  com- 
ply with  the  statute,  or  was  illegal,  and  yet  one  of  the 
parties  has  received  a  benefit;  or,  where  a  benefit  has 
been  conferred  under  compulsion  or  duress. 

MISTAKE.— Where  parties  have  attempted  to 
make  a  contract  and  a  mistake  of  fact  occurs,  no  con- 
tract results.  The  minds  of  the  parties  never  really 
meet.  Yet  if  benefits  have  been  conferred,  justice  re- 
quires that  the  benefit  should  be  returned,  or  compen- 


COMMERCIAL   LAW  117 

sation  given,  and  this,  in  fact,  is  just  what  the  law 
seeks  to  do  when  there  has  been  such  a  mistake  that 
upon  the  attempted  contract  itself  no  suit  can  be 
brought.  The  essentials  of  mistake,  and  the  way  in 
which  a  mistake  usually  arises,  are: 

(1)  It  would  not  be  a  mistake  if  a  party  had  paid 
money  when  he  had  any  reason  to  suppose  it  was  not 
due.  A  recovery  of  money  under  such  circumstances 
cannot  be  allowed. 

(2)  The  payment  must  have  been  induced  by  mis- 
take in  order  to  allow  the  recovery.  This  rule  pre- 
vents the  recovery  of  money  paid  in  settlement  of  a 
disputed  matter ;  but  it  must  be  assumed  that  it  was  to 
the  party's  interest  to  make  the  payment.  However, 
suppose  that  a  compromise  settlement  has  been  made 
in  the  belief  that  certain  facts  were  different  from 
what  they  really  were.  Here  the  mistake  would  have 
induced  the  pa5mient,  and,  hence,  in  such  a  situation  a 
recovery  will  be  allowed. 

(3)  The  fact  regarding  which  a  mistake  has  been 
made  must  also  be  a  material  fact,  and  the  fact  must 
have  been  a  part  of  the  transaction  itself,  not  collateral 
to  it  in  any  way.  A  mistake  as  to  the  value  of  an 
article  purchased,  for  instance,  is  not  a  material  fact. 

(4)  Ordinarily,  money  paid  under  mistake  of  law 
cannot  be  recovered,  although  it  is  against  conscience 
for  the  defendant  to  retain  it.  A  mistake  as  to  the  law 
of  another  State,  however,  is  a  mistake  of  fact,  and 
money  paid  under  such  a  mistake  can  be  recovered. 

(5)  Where  the  party  who  mistakenly  parted  with 
the  money  did  so  because  of  his  own  negligence,  and  to 


118  COMMERCIAL    LAW 

allow  a  recovery  would  throw  a  loss  on  the  other 
party,  he  cannot  recover  what  he  parted  with.  One 
party  cannot  make  another  suffer  because  of  his  own 
negligence.  Where  a  party  paid  money  under  mis- 
take, and  the  payee  was  negligent,  the  party  paying 
may  recover. 

(6)  When  parties  suppose  they  have  made  a  con- 
tract, and  money  has  been  paid,  or  services  rendered, 
under  that  supposed  contract,  but  in  fact  there  was  no 
valid  contract  at  all,  or  there  was  a  mutual  mistake  as 
to  a  term,  this  money,  or  the  value  of  the  services,  may 
be  recovered. 

(7)  When  money  has  been  paid  for  the  transfer 
of  something  by  defendant,  whether  recovery  will  be 
allowed  in  case  it  should  turn  out  that  the  defendant 
had  no  title,  depends  on  the  nature  of  transaction.  If 
the  defendant  made  a  warranty  that  he  had  title,  a 
recovery  may  be  had.  If,  however,  the  defendant 
simply  sold  what  he  had,  whether  that  was  some- 
thing or  nothing,  a  recovery  cannot  be  allowed  un- 
less, as  is  the  law  in  some  States,  a  vendor  impliedly 
warrants  his  title  by  the  fact  of  having  possession. 

(8)  In  the  case  of  parties  mistaking  the  existence 
of  a  subject  matter  of  sale,  if  the  understanding  was 
that  A  was  purchasing  an  existing  thing,  then  he  can 
recover  the  money  paid  if  it  should  turn  out  that  the 
thing  was  not  in  existence.  But  if  he  bought  simply  a 
chance,  he  cannot  recover. 

BENEFITS  CONFERRED  UNDER  COLOR 
OF  CONTRACT.— Aside  from  the  cases  of  mistake, 
there  are  other  grounds  for  allowing  recovery  under 


COMMERCIAL    LAW  119 

the  principle  of  quasi  contract.  A  group  of  these  is 
made  up  of  cases  where  there  cannot  be  a  recovery 
upon  the  contract  itself,  although  the  parties  have 
come  together  and  agreed  without  any  mistake  or 
misunderstanding,  because  of  the  absence  of  some 
essential  necessary  to  create  an  enforceable  contract 
obligation;  yet  a  benefit  has  been  conferred  upon  the 
one  party  who,  but  for  the  lack  of  that  essential,  would 
have  been  liable  in  an  action  upon  the  contract  itself. 
Such  cases  arise  largely  where  there  has  been  a  partial 
performance  of  an  illegal  contract,  or  of  a  contract 
unenforceable  because  of  non-compliance  with  the  sta- 
tute of  frauds,  or  v/here  full  performance  is  excused  by 
impossibility.  Some  States  also  allow  recovery  on 
the  theory  of  benefits  conferred,  where,  after  partial 
performance,  a  party  defaults  under  circumstances  not 
excusing  default. 

BENEFITS  CONFERRED  WITHOUT  CON- 
TRACT.— We  next  take  up  that  class  of  relations 
where  there  has  been  an  absence  of  distinct  offer  and 
acceptance,  and  yet  a  benefit  has  been  conferred  re- 
sulting in  an  unjust  enrichment  of  the  other  party. 
If  A  confers  benefit  on  B,  though  at  B's  request,  it 
may  be  merely  a  gift.  A  cannot  afterward  change  his 
mind  and  recover  for  that,  as  if  there  had  been  a  con- 
tract. A  may  have  paid  B's  debt  in  order  to  prevent 
a  sale  of  his  own  property.  He  may  then  recover  the 
amount  so  paid.  For  example,  A  left  his  property 
with  B  to  have  some  repairs  made.  A  third  party 
recovered  a  judgment  against  B,  and  A's  property 
was  seized  on  an  execution.    A  paid  the  judgment  in 


120  COMMERCIAL   LAW 

order  to  release  his  own  property.  It  was  held  that  he 
might  recover  the  money  so  paid  from  B,  who  should 
have  paid  the  judgment.  Or  A  may  have  paid  B's 
debt  because  he  was  surety  for  B.  He  then  may  re- 
cover from  B  the  amount  so  paid;  or,  if  B  had  two 
sureties,  A  and  C,  and  A  paid  the  whole  or  more  than 
his  share,  he  could  recover  the  share  of  such  payment 
which  C  should  have  paid,  on  the  principle  of  contri- 
bution that  equality  is  equity.  But  A  must  have  ac- 
tually made  the  payment  of  more  than  his  proportion- 
ate share. 


CHAPTER  IV 


Principal   and   Agent;  Master  and 

Servant 

THE  IMPORTANCE  OF  AGENCY.— Now 
that  we  have  finished  our  discussion  of  the  gen- 
eral principles  of  contract  law,  it  remains  for 
us  to  apply  these  principles  to  the  specific  topics  of 
commercial  law.  Of  these,  the  law  of  agency  is  one  of 
the  most  important.  It  is  perfectly  obvious  that  a 
man  can  be  in  only  one  locality  at  a  given  time.  Under 
modern  business  conditions  he  may  wish  to  perform 
acts  in  different  places  at  the  same  time.  When  busi- 
ness men  were  first  confronted  with  problems  of  this 
kind,  the  principles  of  the  law  of  agency  began  to  de- 
velop. They  resorted  to  the  simple  expedient  of  hav- 
ing others  represent  them.  If  these  representatives 
were  properly  instructed  in  their  duties  and  faithful 
in  discharging  them,  there  was,  of  course,  no  reason 
why  the  will  of  the  person  who  had  appointed  them 
was  not  as  fully  accomplished  as  if  he  had  performed 
the  act  himself.  The  Latin  maxim,  "Qui  facit  per 
alium  facit  per  se,"  that  is,  "He  who  acts  through  an- 
other, acts  himself,"  is  the  basis  of  the  law  of  agency. 
The  growing  importance  of  the  law  of  agency  is  strik- 
ingly apparent  in  one  branch  of  modern  business. 
Fifty  years  ago,  the  great  majority  of  business  opera- 
tions were  conducted  either  by  individuals  or  by  part- 
nerships. To-day,  especially  in  conducting  large  busi- 

121 


122  COMMERCIAL    LAW 

ness  enterprises,  corporations  have  replaced  individ- 
uals and  partnerships.  Although  (as  we  shall  see 
later  in  the  chapter  on  corporations)  in  law  a  corpo- 
ration is  deemed  a  separate,  legal  entity,  distinct  from 
the  stockholders,  in  actual  practice  we  know  that 
there  is  no  such  distinct  physical  being  as  a  corpora- 
tion. It  follows,  therefore,  that  every  act  performed 
by  a  corporation  must  be  performed  through  an 
agent.  With  the  enormous  increase  in  the  number  of 
corporations  in  the  last  twenty-five  years,  and  that 
increase  still  continuing,  we  can  see  that  the  law  of 
agency  is  a  most  important  branch  of  commercial  law 
and  very  closely  connected  with  corporation  law. 

AGENCY  DEFINED.— Merely  for  purposes  of 
convenience,  it  may  be  best  to  divide  the  whole  sub- 
ject of  agency  into  three  branches:  Principal  and 
agent;  master  and  servant;  employer  and  indepen- 
dent contractor.  The  term  "agency,"  when  used  in 
the  broad  sense,  indicates  a  relation  which  exists 
where  one  person  is  employed  to  act  for  another.  At 
the  outset,  we  should  keep  in  mind  the  distinctions 
between  the  agent,  the  servant,  and  the  independent 
contractor.  It  is  difficult  to  indicate  these  distinctions 
with  absolute  certainty  by  definition.  An  illustra- 
tion, however,  will  show  clearly  what  the  difference 
is.  I  own  an  apartment  house  in  New  York,  but  as  I 
am  not  in  the  city,  except  infrequently,  I  employ  the 
real  estate  firm  of  Smith  &  Jones  to  manage  the 
apartments  and  collect  the  rents.  They  are,  of  course, 
my  agents,  to  act  in  the  premises.  I  own  an  automo- 
bile and  I  employ  a  chauffeur  to  operate  the  car  for 


COMMERCIAL    LAW  123 

me.  He  is  my  servant.  I  own  a  vacant  lot  in  New 
York  and  on  it  plan  to  erect  an  office  building.  I  em- 
ploy the  Smith  Construction  Company  to  erect  the 
building.  It  is  an  independent  contractor.  What  is 
the  rule,  then,  to  determine  the  distinction  between 
these  three  persons?  All  three  persons  represent  the 
principal,  or  the  master,  or  the  employer,  but  the  line 
of  distinction  lies  here :  An  agent  is  employed  to  bring 
the  principal  into  new  contractual  obligations;  a  ser- 
vant represents  his  master  in  the  performance  of  min- 
isterial, or  mechanical  acts  or  services,  with  no 
thought  of  bringing  his  master  into  new  contractual 
relations  with  third  persons.  A  person  who  is  em- 
ployed to  perform  ministerial  or  mechanical  acts  for 
another,  as  we  have  said,  is  a  servant,  but  there  are 
cases  where  the  master  retains  no  control  or  right 
of  control  of  the  means  or  methods  by  which  such 
work  is  to  be  accomplished.  In  this  latter  case,  the 
person  performing  the  v/ork  is  not  a  servant,  but  is  an 
independent  contractor. 

HOW  AGENCY  MAY  ARISE.— Although 
agency  undoubtedly  originated  from  the  relationship 
of  master  and  servant,  and  that  relationship  from  the 
enforced  service  rendered  by  slaves  to  their  master, 
to-day  the  law  of  agency  in  the  broad  sense  is  a  con- 
tractual relationship.  The  agent  or  servant  or  inde- 
pendent contractor  becomies  such  upon  the  express 
or  implied  request  of  the  principal.  Although  agency 
may  exist,  in  so  far  as  third  persons  are  concerned, 
without  any  formal  contract  betw^een  the  principal 
and  the  agent,  yet,  in  the  great  majority  of  cases,  there 


124  COMMERCIAL    LAW 

is  an  actual  contract  between  the  parties  to  the  rela- 
tion. Compensation,  although  usually  an  element  in 
the  contract,  is  not  necessarily  a  requisite.  For  in- 
stance, I  may  be  liable  for  the  negligent  act  of  my  son 
in  running  my  automobile  in  connection  with  my  busi- 
ness, although  he  is  acting  without  any  compensation. 
There  are  four  methods  by  which  the  relationship  of 
agency  arises:  (1)  By  contract;  (2)  by  ratification; 
(3)  by  estoppel;  (4)  by  necessity. 

WHO  IS  OR  MAY  BE  AN  AGENT.— The  law 
of  agency,  as  between  principal  and  agent,  is  simply 
an  application  of  the  general  law  of  contracts,  but  as 
between  third  parties  and  the  principal,  or  agent,  new 
questions  arise.  The  first  question  is,  who  is  an  agent 
and  who  is  a  principal?  Any  employer  is  a  principal 
and  any  employee  is  an  agent.  The  employer  is  a  prin- 
cipal whether  he  employs  the  employee  for  a  single 
act  or  whether  he  employs  him  for  a  period  of  time. 
Besides  the  ordinary  cases  that  you  will  think  of  under 
the  head  of  employer  and  employee,  an  officer  of  a 
corporation  is  an  agent,  the  corporation  being  the 
principal.  The  president  of  a  corporation  is  as  much 
an  agent  as  a  clerk  in  the  employ  of  the  corporation. 
A  partner  is  an  agent — of  the  firm.  These  different 
kinds  of  agents  are  distinguished  chiefly  in  the  differ- 
ent scope  of  the  authority  which  they  possess. 

DISABILITY. — In  our  discussion  of  contracts, 
we  found  that  certain  persons  were  under  disability 
so  far  as  making  contracts  was  concerned.  We  men- 
tioned the  case  of  infants,  married  women,  insane  per- 
sons, and  the  like.  The  same  disabilities  do  not  exist 


COMMERCIAL   LAW  125 

in  the  law  of  agency,  so  far  as  the  agent  is  concerned. 
Any  person  may  act  as  an  agent  or  servant.  So  in- 
fants, married  women,  slaves,  and  even  lunatics,  may 
be  agents  or  servants  whose  acts  will  bind  their  prin- 
cipals. It  has  been  held  that  even  a  dog  may  be  an 
agent.  As  to  who  may  be  a  principal,  the  ordinary 
rules  of  contracts,  as  we  have  discussed  them,  may  be 
relied  upon  as  giving  the  correct  rule. 

AGENCY  BY  CONTRACT.— Concerning 
agency  which  arises  by  contract,  little  need  be  said. 
A  contract  of  agency  must  possess  all  of  the  elements 
of  the  ordinary  contract,  such  as  mutual  assent,  con- 
sideration, competent  parties,  legality  of  object,  and 
in  some  cases,  a  particular  form.  The  general  prin- 
ciples of  contract  law  as  we  have  discussed  them  are 
applicable  to  this  method  of  forming  the  agency  rela- 
tionship. 

POWERS  OF  ATTORNEY.— In  connection 
with  the  formation  of  agency  by  contract,  special  at- 
tention must  be  given  to  powers  of  attorney.  A  power 
of  attorney  must  oftentimes  be  given  in  order  to  con- 
vince third  persons  that  the  agent  really  is  an  agent, 
with  the  powers  which  he  claims  to  possess.  A  power 
of  attorney  is  nothing  more  than  a  written  statement 
that  a  particular  person  is  the  agent  of  another  per- 
son, with  the  powers  stated  in  the  document.  A  power 
of  attorney  may  be  very  broad,  giving  the  agent  very 
wide  powers,  or  may  be  narrow,  giving  the  agent  or 
attorney  power  to  do  only  a  specific  thing.  Now, 
many  powers,  so  far  as  the  law  itself  is  concerned, 
might  just  as  well  be  oral  as  written,  but  you  could 


126  COMMERCIAL    LAW 

not  induce  third  parties  to  deal  with  the  agent  and 
believe  that  he  had  authority  unless  he  showed  as 
proof  of  it  a  power  of  attorney.  That  is  why  a  power 
of  attorney  is  generally  given;  not  that  the  law  re- 
quires it,  but  that  the  agent  may  have  evidence  of  his 
agency  which  will  satisfy  third  persons  that  he  is 
really  the  agent.  A  corporation  would  not  transfer 
stock  without  a  written  power  presented  to  it ;  yet,  if 
it  chooses  to  run  the  risk,  there  would  be  nothing  ille- 
gal in  doing  so.  But  it  does  not  choose,  and  an  at- 
tempt to  compel  it  to  transfer  would  be  held  unrea- 
sonable unless  the  authority  of  the  person  claiming 
to  be  empowered  to  transfer  the  stock  were  in  writing 
and  shown  to  it. 

WITNESSED  AND  SEALED  POWERS  OF 
ATTORNEY. — A  witness  is  not  necessary  on  a 
power  of  attorney.  A  witness  on  a  power  of  attorney 
has  the  same  effect  as  on  any  other  document  where 
a  witness  is  not  absolutely  required,  and  that  is  this: 
if  the  signature  of  a  document  is  called  in  question 
and  the  signature  is  witnessed,  the  way  which  the 
law  requires  proof  of  the  signature  is  by  calling  the 
witness  to  testify,  and  no  other  evidence  is  permis- 
sible until  the  witness  is  produced  or  his  absence  ac- 
counted for;  that  is,  some  adequate  reason  given  and 
proved  for  not  producing  the  particular  man  who 
witnessed  the  signature.  For  this  very  reason  it  is 
sometimes  more  difficult  to  prove  a  signature  which 
is  witnessed  than  one  v/hich  is  not.  A  signature  which 
is  not  witnessed  may  be  proved  by  anybody  who  has 
seen  the  person  sign,  or  who  is  familiar  with  his  sig- 


COMMERCIAL    LAW  127 

nature,  and  who  can  testify  that  the  signature  in  ques- 
tion is  his.  The  object  of  a  witness  is  to  provide  cer- 
tain evidence  that  a  signature  is  genuine.  The  testi- 
mony of  a  witness  may  be  more  convincing  in  case  of 
a  dispute  than  testimony  of  one  who  merely  recog- 
nizes the  signer's  handwriting.  A  witnessed  power 
of  attorney  might  be,  however,  more  difficult  to  prove 
if  the  power  of  attorney  were  contested  than  if  it  was 
not  witnessed,  that  is,  if  the  witness  could  not  be 
found.  On  the  other  hand,  if  you  had  your  witness 
within  reach  it  would  be  easy  to  prove  the  signature 
by  him.  The  whole  matter  of  witnesses  to  deeds  and 
other  documents,  where  a  witness  is  not  absolutely 
required,  may  be  thus  summarized :  it  is  a  good  thing 
to  have  a  witness  if  the  witness  is  a  reliable,  well- 
known  person  who  can  always  or  generally  be 
reached.  It  is  a  bad  thing  to  have  a  witness  who  is  a 
servant  or  a  person  whom  you  may  lose  sight  of  after 
some  time  has  elapsed.  The  question  may  also  be 
asked:  How  does  a  power  of  attorney,  when  given 
under  seal,  compare  with  one  without  a  seal?  One  is 
as  good  as  the  other,  except  that  if  it  is  desired  that 
the  attorney  or  agent  shall  execute  any  instrument 
under  seal,  such  as  a  deed  of  real  estate,  the  power 
must  itself  be  under  seal ;  but  a  power  to  do  anything 
which  does  not  require  the  execution  of  a  sealed  in- 
strument is  just  as  good  without  a  seal  as  with  one. 
This,  however,  is  true ;  if  the  power  contains  an  agree- 
ment by  the  principal  not  to  revoke  the  power,  this 
agreement  will  not  be  binding  if  there  is  neither  seal 
nor  consideration,  but  will  be  binding  without  consid- 


128  COMMERCIAL    LAW 

eration  if  under  seal,  in  a  State  where  seals  still  have 
their  common-law  effect.  The  principal  will  be  able, 
it  is  true,  even  in  such  a  case,  to  revoke  the  power, 
but  he  will  commit  a  breach  of  contract  if  he  does. 

AGENCY  BY  RATIFICATION.— Where  the 
assent  of  the  principal  to  the  act  of  the  agent  is  given 
after  the  act  is  performed,  it  is  in  the  nature  of  a  rati- 
fication of  the  act,  and  is  intended  to  clothe  the  act 
with  the  same  qualities  as  if  there  had  been  a  previous 
authority  or  appointment.  Suppose,  for  example,  A 
and  B  are  acquaintances.  Both  are  wealthy.  A  is  a 
good  judge  of  horses  and  knows  B  likes  good  horses. 
A  discovers  what  he  considers  a  good  horse  and  buys 
it  for  B  at  a  very  low  price.  He  tells  B  the  next  day 
what  he  has  done  and  B  goes  to  get  the  horse  and 
tenders  the  price,  but  the  dealer  refuses  to  sell,  as  he 
has  been  offered  a  higher  price.  B  has  a  cause  of 
action  for  breach  of  contract,  for  by  ratifying  A's  act, 
he  has  made  a  binding  contract  between  himself  and 
the  dealer.  Suppose  in  the  same  illustration,  A  had 
selected  two  horses  for  B,  but  when  B  saw  them  he 
decided  to  take  only  one  of  them.  In  that  case,  there 
would  be  no  contract,  for  it  is  fundamental  that  a 
ratification,  to  be  effective,  must  be  of  the  whole  con- 
tract, and  rot  of  a  part.  A  ratification,  once  it  is  given, 
dates  back  to  the  original  transaction  and  is  irrevoc- 
able. 

FORMATION  OF  AGENCY  BY  ESTOPPEL. 
— An  estoppel  may  be  said  to  arise  where  a  person 
does  some  act  which  will  preclude  him  from  averring 
anything  to  the  contrary.    So,  if  one  holds  out  another 


COMMERCIAL    LAW  129 

as  his  agent,  he  is  estopped  to  repudiate  the  acts  of  such 
a  person  within  the  scope  of  his  ostensible  authority. 
In  the  case  of  Bradish  v.  Belknap,  41  Vt.  172,  the  facts 
were  that  for  a  long  time  prior  to  1863,  B  was  the 
agent  of  the  defendants  in  selling  stoves.  This  fact 
was  generally  known  and  was  well  known  to  the  plain- 
tiff. In  1863  B  ceased  to  be  the  agent  of  the  defendant, 
but  continued  to  sell  stoves,  which  he  purchased  of 
the  defendants.  No  public  notice  of  the  termination 
of  the  agency  was  given,  nor  was  the  fact  known  to 
the  plaintiff.  B  continued  to  represent  himself  as 
agent  of  the  defendants  and  was  in  the  habit  of  taking 
notes  for  stoves  sold,  payable  to  the  defendants,  and 
this  was  known  to  the  defendants.  The  plaintiff,  be- 
lieving B  to  be  the  agent  of  the  defendant,  offered  to 
buy  a  stove  of  him  and  pay  him  in  pine  lumber.  To 
this  B  assented  and  the  lumber  was  accordingly  fur- 
nished to  B  and  the  defendants,  together  with  other 
lumber  which  the  plaintiff  charged  up  to  the  defen- 
dants. The  defendants  later  attempted  to  escape  lia- 
bility for  the  lumber  furnished  in  excess  of  the  value 
of  the  stove.  The  court,  holding  them  liable,  said: 
"B  during  all  this  time  was  perfectly  poor  and  irre- 
sponsible, and  this  fact  was  known  by  both  parties. 
B  represented  himself  as  the  agent  of  the  defendants, 
and  the  conduct  of  the  defendants  was  such  as  to  jus- 
tify the  plaintiff  in  regarding  them  as  the  principals; 
and  we  can  hardly  conceive  it  possible  under  the  cir- 
cumstances that  the  defendants  did  not  understand 
that  the  plaintiff  so  regarded  them.  And  to  allow 
them  now  to  deny  the  agency  and  thus  defeat  the 


130  COMMERCIAL    LAW 

plaintiff's  right  to  recover  for  the  balance  of  the  lum- 
ber would  be  permitting  them  to  perpetrate  a  palpable 
fraud  on  the  plaintiff." 

ESTOPPEL  DEFINED.— This  term  will  occur 
several  times  in  the  different  topics  of  commercial  law. 
An  estoppel  may  be  said  to  arise  when  a  party  by  con- 
duct or  language  has  caused  another  reasonably  to 
believe  in  the  existence  of  a  certain  state  of  things  and 
the  other  party  acts  on  that  belief,  the  first  party  is 
precluded  from  denying  the  existence  of  that  state  of 
things  to  any  one  who  has  justifiably  relied  on  his 
language  or  conduct. 

ILLUSTRATION.— There  is  a  common  saying 
in  admiralty,  that  a  seaman's  claim  for  wages  is  nailed 
to  the  last  plank  of  the  vessel.  So  if  boatswain  John 
Silver  is  left  unpaid  by  his  vessel  in  London  and  he 
later  finds  the  vessel  in  New  York,  although  its  own- 
ership has  entirely  changed  meanwhile,  he  may  still 
file  a  libel  for  his  wages  and  have  the  United  States 
Marshal  for  the  Southern  District  of  New  York  seize 
the  vessel.  Suppose  however  you  contemplate  buying 
a  vessel.  You  go  on  board  with  the  present  owner 
and  while  all  the  members  of  the  crew  are  lined  up  on 
the  main  deck,  you  ask  him  in  a  voice  loud  enough  to 
be  heard  by  everybody  whether  there  are  any  unpaid 
wage  claims.  He  replies  that  everything  is  paid  to 
date.  The  crew  remain  silent.  You  purchase  the 
vessel  and  a  few  weeks  later  members  of  this  same 
crew  seek  to  collect  from  the  vessel  a  wage  claim  of 
one  year's  standing.  Their  claims  against  the  vessel 
or  agciinst  you  as  owner  are  unenforcable.    In  other 


COMMERCIAL    LAW  131 

words,  they  are  estopped  because  of  their  conduct 
when  you  purchased  the  vessel.  If  a  person  does  not 
speak  when  he  ought,  at  times  the  law  will  not  allow 
him  to  speak  when  he  wishes.  Boatswain  Silver  had 
never  done  anything  to  preclude  him  from  asserting 
his  wage  claim.  His,  therefore,  is  not  a  case  of  es- 
toppel. 

AGENCY  BY  NECESSITY.— The  authority  of 
the  agent  may  be  enlarged  by  some  particular  neces- 
sity or  sudden  emergency  in  which  case  it  is  the  duty 
of  the  agent  to  act,  even  though  he  cannot  receive 
the  advice  or  directions  of  his  principal.  This  method 
of  creating  the  agency  relationship  is  one  upon  which 
the  courts  are  not  agreed,  and  there  is  great  conflict 
in  the  decisions.  The  case  of  Gwilliam  v.  Twist, 
(1895)  1  Q.  B.  557,  and  2  Q.  B.  84,  is  a  good  illustra- 
tion of  how  close  the  line  may  be  drawn.  The  facts 
were  that  the  driver  of  an  omnibus  belonging  to  de- 
fendants became  intoxicated  while  on  duty  and  was 
taken  from  his  seat  by  a  policeman.  A  man  who  hap- 
pened to  be  standing  near  volunteered  to  drive  the 
omnibus  to  the  defendant's  yard,  and  the  driver  and 
conductor  acquiesced,  the  former  warning  him  to 
drive  carefully.  The  volunteer  in  negligently  turning 
a  corner  ran  over  and  injured  the  plaintiff,  who 
brought  action  for  damages  against  the  defendants, 
owners  of  the  omnibus.  The  trial  court  held,  with 
considerable  hesitation,  that  the  defendants  were 
liable  for  the  injury,  placing  its  decision  upon  the 
ground  of  agency  by  necessity ;  but  the  court  of  appeal 
reversed  the  decision  on  the  ground  that  the  neces- 


132  COMMERCIAL   LAW 

sity  did  not  sufficiently  appear,  since  the  defendants 
might  have  been  communicated  with,  and  left  open 
the  question  whether,  if  there  had  been  an  actual  ne- 
cessity, the  defendants  would  have  been  liable. 

RIGHT  OF  PRINCIPAL  TO  DILIGENT 
AND  SKILLFUL  SERVICE.— Let  us  consider,  first, 
the  rights  of  the  principal  and  agent  as  between  one 
another.  The  rights  which  the  principal  has  against 
the  agent  are,  first,  a  right  to  have  the  employee  ren- 
der reasonably  diligent  and  skillful  service.  The 
amount  of  skill  which  the  employer  can  fairly  demand 
from  his  agent  depends  on  the  character  of  the  con- 
tract between  the  two  and  on  the  circumstances  justi- 
fying the  principal  in  expecting  a  greater  or  less 
degree  of  skill.  When  a  man  employs  an  expert 
accountant  to  act  for  him  he  has  a  right  to  expect 
greater  skill  than  if  he  were  employing  an  ordinary 
bookkeeper.  It  depends  on  the  character  of  the  work 
and  of  the  man  employed.  The  amount  of  compen- 
sation paid  to  the  employee  may  also  have  a  bearing 
on  the  amount  of  skill  the  employer  has  a  right  to 
expect. 

RIGHT  OF  PRINCIPAL  THAT  AGENT 
SHALL  NOT  EXCEED  HIS  AUTHORITY.— The 
second  right  that  a  principal  has  is  to  demand  from 
his  agent  that  the  agent  shall  act  in  obedience  to 
instructions  and  only  within  the  limits  of  his  author- 
ity. These  limits  may  be  fixed  expressly  in  the  con- 
tract between  principal  and  agent,  or  they  may  be 
left  wholly  to  implication  from  the  nature  of  the  em- 
ployment.   Perhaps  more  commonly  they  are  partly 


COMMERCIAL    LAW  133 

fixed  by  express  agreement  and  partly  fixed  by  nat- 
ural implications  which  arise  from  the  nature  of  the 
employment. 

RIGHT  OF  PRINCIPAL  TO  ACCOUNTING. 
— Thirdly,  the  principal  has  a  right  in  financial  deal- 
ings with  his  agent,  or  in  regard  to  financial  dealings 
of  the  agent  with  third  persons,  to  demand  an  account 
from  his  agent.  It  is  not  enough  that  the  agent  actu- 
ally expend  money  intrusted  to  him  correctly;  he 
must  furnish  a  correct  account  of  expenses  and  of 
collections. 

RIGHT  OF  PRINCIPAL  TO  FIDELITY.— 
Finally,  the  agent  is  under  a  duty  of  fidelity  or  loy- 
alty to  his  principal.  The  principal  is  entitled  to  de- 
mand that  the  agent,  unless  the  contrary  is  agreed, 
shall  make  the  employment  or  agency  his  sole  interest 
in  regard  to  that  particular  thing.  Of  course,  in  many 
agencies  the  agent  is  undertaking  a  great  deal  of 
outside  business  besides  the  particular  agency  in 
question,  and  he  has  a  right  so  to  do  so  long  as  the 
principal  has  not  engaged  his  whole  time,  and  so  long 
as  one  agency  does  not  interfere  with  another.  But 
that  last  is  an  important  point.  An  agent  who  under- 
takes one  task  for  one  principal  which  occupies  only 
one-tenth  of  his  time  cannot  take  another  employ- 
ment which  is  inconsistent  with  that.  An  agent  to 
sell  a  particular  kind  of  goods  for  one  principal,  even 
though  his  agency  is  not  expected  to  take  the  agent's 
whole  time,  cannot  undertake  an  agency  for  a  com- 
peting principal.  The  two  things  are  inconsistent, 
and  the  agent  would  be  disloyal  if  he  accepted. 


134  COMMERCIAL    LAW 

SIDE  COMPENSATION.— Then,  again,  the 
agent  must  not  get  what  may  be  called  "side  com- 
pensation" of  any  sort.  His  whole  compensation  as 
agent  must  be  what  is  due  him  directly  from  the  prin- 
cipal under  the  agreement.  For  instance,  if  a  buyer 
for  a  department  store  gets  paid  a  commission  by  a 
firm  from  v/hich  he  buys  goods,  that  is  a  side  com- 
mission which  the  buyer  as  an  agent  has  no  right  to 
take;  and  so  strict  is  the  law,  that  if  an  agent  does 
take  any  such  extra  compensation  the  principal  has 
a  right  to  recover  it  from  him.  Of  course,  if  the  prin- 
cipal agrees  to  side  compensation,  it  is  all  right  for 
the  agent  to  take  it;  when  the  principal  agrees  to  it, 
it  ceases  to  be  what  we  have  called  side  compensation 
and  becomes  part  of  the  agent's  direct  compensation 
to  which  he  is  entitled  under  his  bargain  with  his 
principal. 

ACTING  AS  AGENT  FOR  BOTH  PARTIES. 
— One  of  the  most  common  difficulties  that  agents  get 
into  in  regard  to  this  requirement  of  fidelity,  and 
sometimes  with  entirely  good  faith,  is  undertak- 
ing to  act  as  agent  for  both  parties.  That  cannot  be 
done  unless  each  party  especially  agrees  that  the 
agent  may  act  for  the  adverse  party.  An  attorney-at- 
law  cannot  represent  two  sides  of  a  case.  A  real  estate 
broker  cannot  represent  buyer  and  seller,  and  a  stock 
broker  cannot  represent  buyer  and  seller.  Stock  bro- 
kers have  one  practice  which  perhaps  may  seem  to 
infringe  this  rule.  A  customer  comes  into  a  broker's 
office  and  says  he  wants  to  buy  100  shares  of  New 
York  Central.     About  the  same  time  another  cus- 


COMMERCIAL    LAW  135 

tomer  comes  in  and  says  he  wants  to  sell  100  shares 
of  New  York  Central.  Now,  must  a  broker  go  on  the 
exchange  and  make  a  purchase  for  one  customer  and 
then  a  sale  for  the  other,  or  may  he,  so  to  speak,  nego- 
tiate through  himself  a  sale  for  the  customer  who 
wants  to  buy  from  the  one  who  wants  to  sell?  What 
he  frequently  does,  in  fact,  is  this :  He  buys  and  sells 
from  himself,  but  publicly,  giving  other  brokers  the 
chance  to  buy  or  sell  if  they  wish.  The  broker,  ac- 
cording to  the  rules  of  the  New  York  Stock  Exchange, 
cannot  execute  this  transaction  secretly  in  his  office, 
but  must  offer  the  securities  in  question  on  the  ex- 
change, and  the  purchase  and  sale  must  be  recorded 
on  the  ticker.  If  the  bidding  and  asking  prices  are 
more  than  an  eighth  apart,  he  may  offer  the  New 
York  Central  at  a  price  midway  between  the  bidding 
and  asking  quotations  and  buy  it  himself  and  charge 
each  customer  a  commission,  but  he  must  actually 
make  the  offer  or  bid  aloud  on  the  floor.  The  broker 
is  technically  acting  for  both  parties,  but  he  is  not 
fixing  the  price.  He  makes  an  open  bid  on  the  ex- 
change, and  it  may  be  that  would  save  the  transac- 
tion. 

AGENT'S  RIGHT  TO  COMPENSATION.— 
What  are  the  rights  of  the  agent  against  the  princi- 
pal? They  are  two.  First,  a  right  to  compensation; 
that  is,  a  right  to  the  pay  that  has  been  agreed  upon, 
or,  if  no  pay  was  agreed  upon  but  it  was  understood 
that  there  should  be  some  compensation,  then  a  right 
to  reasonable  compensation.  It  is  perfectly  possible 
to  have  an  agency  without  compensation.  Frequently 


136  COMMERCIAL   LAW 

one  man  agrees  to  act  for  another  without  pay,  and 
an  agent  who  is  acting  without  compensation,  so  long 
as  he  acts  as  agent,  is  bound  to  the  same  obligations 
to  his  principal  as  if  he  were  receiving  compensation, 
only  he  can  withdraw  from  his  agency  whenever  he 
sees  fit  since  he  is  not  paid  for  it.  But  unless  circum- 
stances show  that  an  agency  was  understood  to  be 
without  compensation,  it  would  be  implied  that  rea- 
sonable compensation  was  to  be  paid  to  the  agent  for 
his  services. 

AGENT'S  RIGHT  TO  REIMBURSEMENT.— 
The  other  right  of  the  agent  is  the  right  to  reimburse- 
ment and  indemnity.  As  the  agent  is  acting  for  the 
principal,  the  principal  ought  to  pay  all  the  bills  of 
whatever  kind  incurred,  so  long  as  the  agent  is  acting 
rightfully  within  his  authority,  and  the  principal  is 
bound  to  pay  all  such  bills.  This  obligation  of  the 
principal  to  pay  all  the  bills  of  the  agency  means  not 
simply  that  he  must  pay  actual  expenses,  but  that  if 
liabilities  of  any  kind  arise  by  reason  of  third  persons 
suing  the  agent  or  holding  him  liable,  if  the  action  of 
the  agent  was  within  his  authority,  the  principal  must 
indemnify  against  any  loss. 

PRINCIPAL  BOUND  TO  THIRD  PERSONS 
BY  AUTHORIZED  ACTS  OF  AGENT.— Now  let 
us  turn  from  the  rights  of  principal  and  agent  as  be- 
tween one  another  to  the  rights  of  third  persons. 
When  do  third  persons  get  rights  against  the  prin- 
cipal? In  the  first  place,  whenever  the  agent,  acting 
in  accordance  with  his  authority,  enters  into  a  trans- 
action with  a  third  person  on  behalf  of  the  principal. 


COMMERCIAL    LAW  137 

the  principal  is  bound  to  the  third  person  to  just  the 
same  extent  as  if  he  himself  had  entered  into  the 
transaction ;  but  it  is  not  only  in  cases  where  express 
authority  is  given  to  the  agent  that  this  principle  ap- 
plies. 

IMPLIED  AUTHORITY  OF  AGENT.— In 
many  cases  the  authority  given  an  agent  is  not  ex- 
pressly stated.  One  has  to  rely  on  the  general  course 
of  business  and  on  the  nature  of  the  employment  to 
determine  the  extent  of  the  agent's  authority.  A  third 
person  deals  with  a  cashier  of  a  bank,  or  deals  with 
the  paying  teller,  or  he  deals  with  the  president ;  now 
whether  the  bank  is  bound  by  that  dealing  depends 
on  what  is  by  general  custom,  or  course  of  business, 
the  authority  of  a  cashier  or  a  paying  teller  or  a  presi- 
dent. If  cashiers  or  paying  tellers  or  presidents  gen- 
erally have  certain  authority,  then  it  is  a  fair  assump- 
tion that  this  particular  officer  has  such  authority. 

AUTHORITY  TO  DO  PARTICULAR  ACTS. 
— An  agent  to  sell  has  generally  no  authority  to  make 
a  sale  on  credit  or  to  receive  anything  but  money ;  he 
cannot  barter  or  exchange  the  property  even  in  part, 
nor  pledge  or  dispose  of  the  property  to  be  sold  in 
payment  of  his  own  debts.  For  the  sale  of  land  an 
agent's  authority  ought  always  to  be  under  seal,  and 
the  provisions  contained  in  this  power  of  attorney 
will  be  strictly  construed.  In  a  sale  of  personal  prop- 
erty, an  agent  has  implied  authority  to  do  whatever 
is  usual  and  necessary  in  such  transactions.  He  may 
receive  payment  if  he  has  possession  of  the  goods,  but 
not  otherwise,  and  warrant  the  quality,  if  such  goods 


138  COMMERCIAL    LAW 

are  customarily  sold  with  a  warranty  by  agents.  He 
cannot  sell  on  credit  unless  such  is  the  custom,  as  in 
the  case  of  commission  merchants,  nor  pledge  or 
mortgage  the  goods.  The  agent  may  not  buy  on  credit 
unless  so  authorized,  or  it  is  the  custom  of  the  trade ; 
but  a  principal's  direction  to  purchase,  without  sup- 
plying the  agent  with  funds,  will  imply  authority  to 
purchase  on  credit.  The  agent  must  purchase  pre- 
cisely as  directed.  An  agent  to  manage  has  an  author- 
ity co-extensive  in  scope  with  the  business,  and 
possesses  the  same  power  and  authority  as  the  prin- 
cipal, so  far  as  management  goes,  but  the  agent  may 
not  sell  or  dispose  of  a  business,  nor  mortgage  the  pro- 
perty used  in  carrying  it  on,  nor  engage  in  new  and 
different  enterprises.  Public  agents,  i.  e.,  public 
officers,  cannot  involve  their  principals,  the  municipal 
corporations  whose  officers  they  are,  in  contract  lia- 
bilities with  third  parties  unless  actually  authorized 
to  do  the  act  in  question ;  and  all  persons  dealing  with 
them  must  inform  themselves  of  the  scope  of  their 
legal  powers. 

APPARENT  AUTHORITY  OF  AGENT.— 
But  it  is  not  only  in  cases  where  the  agent  is  expressly 
authorized,  or  authorized  by  such  implication  as  we 
have  just  alluded  to,  that  the  principal  is  bound. 
There  is  the  further  case  where  the  agent  has  ap- 
parent authority,  although,  as  a  matter  of  fact,  he  has 
no  authority.  Take  the  case  of  a  cashier  certifying  a 
check.  We  will  suppose  that  cashiers,  generally,  have 
authority  to  certify  checks.  With  most  cashiers  that 
would  be  what  we  have  called  an  implied  authority, 


COMMERCIAL    LAW  139 

as  it  arises  from  the  general  nature  of  their  positions 
though  nothing  was  ever  said  about  it  by  the  bank 
directors.  But  suppose  in  a  particular  bank  it  was  a 
rule  of  the  bank,  expressly  stated  and  voted  by  the 
directors,  that  the  cashier  should  not  have  power 
to  certify  checks.  Now,  no  one  can  say  that  his  power 
here  is  either  express  or  implied;  it  is  certainly  not 
express,  and  any  implication  that  might  otherwise 
arise  from  his  position  is  negatived  by  the  express 
vote  of  the  directors,  and  yet  if  that  cashier  should 
certify  a  check  to  any  person  ignorant  of  this  limita- 
tion on  his  authority  the  bank  would  be  bound  by  the 
certification  because  the  cashier  has  apparent  au- 
thority. He  looks  to  the  world  as  if  he  had  authority, 
and  seems  to  the  public  like  any  other  cashier.  Most 
of  the  difficult  cases  in  agency,  so  far  as  liability  of 
the  principal  to  third  persons  is  concerned,  relate  to 
this  matter  of  apparent  authority. 

ILLUSTRATIONS.— Compare  the  following 
case  with  the  case  of  the  cashier  above  alluded  to :  A 
man  who  is  giving  some  support  financially  to  a  book 
dealer  writes  a  note  in  which  he  says,  "I  authorize  A 
B  to  buy  a  stock  of  books  not  exceeding,  at  any  one 
time,  $5,000."  The  book  dealer  shows  that  written 
authority  to  persons  from  whom  he  wishes  to  buy 
books.  They  sell  him  books,  and,  unknown  to  the  last 
person  who  thus  sells  him  books,  he  has  just  before 
bought  a  quantity  which  makes  the  total  largely  ex- 
ceed $5,000.  Is  the  principal  liable  to  the  persons  who 
last  sold  books  to  the  dealer?  The  answer  is  no.  And 
what  is  the  difference  between  that  case  and  the 


140  COMMERCIAL    LAW 

cashier  case?  In  the  book  case  the  last  seller  saw  the 
paper  giving  authority  to  the  book  dealer  to  purchase. 
He  had  no  reason  to  know  that  the  day  before  a  large 
quantity  of  books  had  been  purchased.  He  acted  in 
entire  good  faith  and  the  deception  was  natural.  Still, 
the  employer,  or  the  writer  of  the  letter,  has  done 
nothing  here  to  make  the  last  seller  suppose  that 
$5,000  worth  of  books  had  not  already  been  bought, 
nor  does  the  course  of  business  justify  the  last  seller  in 
supposing  they  might  not  already  have  been  bought. 
It  was  a  hard  question  for  him  to  find  out,  but  on 
the  face  of  the  letter  it  was  evident  that  any  one  who 
dealt  with  the  bookseller  might  have  to  determine  this 
question  or  rely  at  his  peril  on  the  bookseller's  word. 
Here  is  another  case :  a  town  treasurer  was  authorized 
to  borrow  a  certain  sum  of  money.  He  gets  a  certi- 
fied copy  of  the  vote  and  goes  to  one  bank  and  bor- 
rows the  money,  and  goes  to  another  bank  with 
that  same  certified  copy  of  the  vote  and  borrows  the 
money  over  again.  Is  the  town  liable  to  the  second 
bank?  No;  on  the  face  of  the  paper  there  was  but 
one  loan  to  the  town  authorized,  and  any  one  who 
lends  the  money  must  at  his  peril  find  out  whether  a 
loan  has  already  been  made.  When  we  say,  therefore, 
that  a  principal  is  bound  if  his  agent  had  apparent 
authority,  we  do  not  mean  that  whenever  a  third  per- 
son is  deceived  into  the  belief  that  the  agent  has 
authority,  the  principal  is  bound.  Quite  to  the  con- 
trary, the  principal  must  have  in  some  way  been  the 
cause  of  that  deception ;  he  must  have  caused  it  either 
by  some  express  representations,  or  he  must  have 


COMMERCIAL    LAW  141 

caused  it  by  putting  a  man  in  a  place  where  the  gen- 
eral course  of  business  would  induce  the  public  to 
believe  the  agent  had  greater  powers  than  he  had. 

GENERAL  AND  SPECIAL  AGENTS.— It  is 
much  easier  to  find  a  case  of  apparent  authority,  which 
will  bind  the  principal,  if  the  agent  is  a  general  agent 
than  if  he  is  a  special  agent.  A  special  agent  is  an 
agent  authorized  to  do  one  act,  as  this  town  treasurer 
was  authorized  to  make  one  loan.  The  cashier  is  a 
general  agent,  authorized  to  do  any  of  the  great 
variety  of  acts  which  cashiers  ordinarily  do,  and  if  the 
directors  vote  to  take  away  one  of  the  normal  powers 
of  the  cashier,  they  must  make  the  limitation  public  or 
the  bank  will  be  bound  by  the  cashier's  act. 

UNDISCLOSED  PRINCIPAL.— Not  only  may 
the  third  person  hold  the  principal  liable  in  cases 
where  the  agent  purports  to  act  for  the  principal, 
but  also  in  cases  where  the  agent  does  not  disclose  his 
principal  at  all  and  purports  to  act  as  a  principal  him- 
self, so  long  as  it  is  true  that  the  agent  really  was 
acting  in  the  principal's  business.  Suppose  a  selling 
agent  for  a  manufactory  enters  into  a  contract  for  the 
sale  of  goods  produced  in  the  manufactory.  The  sell- 
ing agent,  we  will  further  suppose,  contracts — as  sell- 
ing agents  often  do — in  his  own  name;  but  he  con- 
tracts in  regard  to  the  sale  of  the  product  of  the  prin- 
cipal, the  manufacturer,  and  on  his  behalf.  Now, 
assume  that  this  contract  of  the  sales  agent  was  au- 
thorized ;  the  third  person  may  sue  the  manufacturing 
company,  though  he  did  not  know  of  the  existence  of 
the  manufactory  at  the  time  he  entered  into  the  con- 


142  COMMERCIAL    LAW 

tract,  and  supposed  he  was  contracting  simply  with 
the  agent.  As  it  is  phrased  in  law,  an  undisclosed 
principal  is  liable,  and  conversely,  the  undisclosed 
principal  may  sue  on  this  contract  made  by  the  sales 
agent. 

RATIFICATION.— If  an  agent  acts  beyond  his 
authority,  the  principal,  if  he  chooses,  may  ratify  the 
acts  of  the  agent.  Occasionally  in  an  emergency  it 
becomes  necessary  for  an  agent  who  has  his  principal's 
interest  at  heart  to  take  a  chance  and  act  beyond  the 
authority  given  him.  In  such  a  case,  if  the  principal 
ratifies  it,  it  is  all  right,  both  as  far  as  the  agent  is 
concerned,  and  as  far  as  the  third  person  is  concerned ; 
but,  of  course,  the  principal  is  under  no  legal  obliga- 
tion to  ratify. 

RIGHTS  OF  PRINCIPAL  AGAINST  THIRD 
PERSONS. — Now,  the  right  of  the  principal  against 
the  third  person  is  the  converse  of  the  right  of  the 
third  person  against  the  principal,  of  which  we  have 
beenspeaking.  Generally  when  a  transaction  is  of  such 
a  sort  that  the  third  person  would  have  a  right  of  ac- 
tion against  the  principal,  if  the  principal  fails  to  do  as 
he  agreed,  the  principal  will  have  a  right  of  action 
against  the  third  person  if  the  latter  breaks  his  agree- 
ment. 

PRINCIPAL  IS  LIABLE  FOR  TORTS  OF 
AGENT. — Not  only  is  the  principal  liable  for  the  con- 
tracts of  his  agent,  but  he  is  also  liable  for  any  tort 
which  an  agent  may  commit,  so  long  as  he  is  acting  in 
the  course  of  his  business.  Of  course,  accident  cases 
present  the  commonest  type  of  that  sort  of  liability. 


COMMERCIAL    LAW  143 

A  street  railway  is  liable  for  the  results  of  its  motor- 
man's  neglect,  so  long  as  the  motorman  was  running 
the  car.  If  the  motorman  got  off  the  car  on  a  frolic  of 
his  own,  the  street  railway  would  not  be  liable  for  any- 
thing he  might  do  then.  The  same  principle  may  be 
found  in  other  cases  than  accident  cases.  Suppose 
officers  of  a  corporation  wrongfully  overissue  stock. 
If  those  officers  were  the  officers  authorized  to  issue 
stock,  and,  therefore,  were  acting  in  the  general 
course  of  their  business,  the  corporation  would  be 
liable  for  that  tortious  act  in  overissuing  stock. 

AUTHORITY  MAY  GENERALLY  BE  ORAL 
AS  WELL  AS  WRITTEN.-— The  authority  given 
by  a  principal  to  an  agent  may  in  general  be  oral  as 
well  as  written;  it  is  just  as  good.  There  are,  how- 
ever, a  few  exceptions  to  that.  In  the  first  place,  an 
authority  given  to  an  agent  to  execute  an  instrument 
under  seal  must  itself  be  not  only  written  but  under 
seal.  An  oral  or  a  written  authority,  if  not  under 
seal,  given  to  an  agent  to  convey  land,  which  must 
be  conveyed  by  a  sealed  deed,  would  not  enable 
the  agent  to  make  a  valid  deed.  Where  the  effect 
of  seals  is  abolished  this  principle  is  of  course  no 
longer  applicable.  Generally  an  agent  orally  au- 
thorized to  make  a  contract  to  buy  or  sell  land  may 
bind  his  principal  by  entering  into  such  a  contract. 
The  contract  the  agent  enters  into,  must,  because  of 
the  Statute  of  Frauds,  be  in  writing,  and  signed,  but 
the  agent's  authority  generally  need  not  be  written. 
In  some  States,  however,  written  authority  is  required 
by  statutes. 


144  COMMERCIAL   LAW 

PROXIES. — A  proxy  is  simply  a  written  power 
of  attorney  to  an  agent,  authorizing  him  to  vote  for  a 
stockholder,  and  there,  too,  a  corporation  would  be 
held  justified  in  refusing  to  recognize  any  proxy  that 
was  not  in  writing,  or  any  agent  who  did  not  have  a 
written  proxy  even  though  proxies  were  not  required 
to  be  in  writing. 

LIABILITY  OF  AGENT  TO  THIRD  PER- 
SONS.— How  about  the  rights  and  duties  of  the 
agent  as  against  the  outside  world?  The  agent  is 
liable  to  a  third  person  if  he  commits  a  tort.  It  does 
not  make  any  difference  that  the  principal  is  also 
liable,  the  agent  is  liable  too.  The  third  person  may 
sue  either  the  principal  or  agent  as  he  prefers;  he 
cannot  get  compensation  for  his  injury  more  than 
once,  but  he  can  get  that  either  from  the  principal 
or  agent,  whichever  is  more  convenient.  The  third 
person  may  hold  the  agent  liable  if  the  agent  con- 
tracts for  an  undisclosed  principal.  In  the  case  of  the 
sales  agent  referred  to  a  moment  ago,  where  the  agent 
was  really  acting  as  agent  for  a  manufacturer  but  did 
not  say  so,  the  third  person  might  sue  the  manufac- 
turer on  the  contract ;  but  he  might  sue  the  agent,  and 
if  the  agent  was  held  liable  the  agent  would  have  to 
seek  reimbursement  from  the  principal. 

AGENT  WARRANTS  HIS  AUTHORITY.— 
An  agent  is  liable  in  one  other  case  to  the  third  per- 
son with  whom  he  deals.  If  the  agent  did  not  have 
authority  to  do  what  he  purported  to  do,  the  third  per- 
son can  sue  him,  though  the  third  person  could  not 
sue  the  principal  in  this  case,  since  the  agent  was 


COMMERCIAL    LAW  145 

exceeding  his  authority.  An  agent  is  said  to  warrant 
his  authority  to  third  persons  with  whom  he  does 
business. 

AGENT  CANNOT  DELEGATE  AUTHOR- 
ITY.— An  important  rule  in  agency  is  that  an  agent 
cannot  delegate  his  authority.  If  A  is  appointed  to 
do  certain  work,  A  must  do  it  himself,  and  cannot 
empower  B  to  do  it  if  it  proves  inconvenient  to  do 
it  himself.  There  are  three  exceptions  to  this  rule. 
The  first  is  that  if  he  is  given  express  permission  to 
delegate  his  authority,  he  may  do  so,  and,  of  course, 
if  the  principal  should  ratify  an  unpermitted  delega- 
tion of  authority,  the  ratification  would  here,  as  al- 
ways, serve  as  well  as  original  authority.  The  second 
case  is  where  the  usage  of  business  is  such  that  the 
principal  must  be  presumed  to  have  understood  that 
there  was  to  be  a  delegation,  or  partial  delegation, 
of  authority,  and  in  such  a  case,  though  the  principal 
has  not  expressly  authorized  delegation,  he  will  be 
treated  as  if  he  had  authorized  it  by  virtue  of  business 
usage.  The  third  case  where  delegation  is  author- 
ized is  in  regard  to  what  are  called  ministerial  or 
mechanical  acts,  that  is,  acts  which  involve  no  exer- 
cise of  judgment  or  skill.  The  principal  is  entitled  to 
the  agent's  judgment  and  skill,  but  if  there  are  parts 
of  the  work  that  do  not  require  skill  and  that,  from 
their  nature,  any  ordinary  clerical  assistant  can  do, 
then  such  acts  may  be  delegated. 

TERMINATION  OF  AGENCY  BY  ACT  OF 
PARTIES. — The  parties  may  have  agreed  in  their 
contract  that  it  should  terminate  at  a  certain  time  or 


146  COMMERCIAL    LAW 

on  the  happening  of  a  certain  event.  The  arrival  of 
that  time  or  the  happening  of  the  event  would  of 
course  end  the  relation  as  between  them.  It  would 
not  so  operate  as  between  principal  and  third  parties, 
however,  unless  the  third  parties  were  informed.  So, 
performance  of  the  purpose  for  which  the  relation 
was  created  terminates  the  relation  as  between  prin- 
cipal and  agent.  The  parties  may  make  a  subsequent 
agreement  to  terminate  the  relation,  and  such  an 
agreement  would  be  good,  the  abandonment  of  the 
rights  of  each  party  created  by  the  original  contract 
being  a  sufficient  consideration  for  the  promise  of 
each  to  surrender  his  own  rights. 

REVOCATION.— Except  in  the  case  of  irrevoc- 
able agency  noted  below,  the  principal  may  revoke  at 
any  time  the  agent's  authority  as  to  matters  not  al- 
ready executed.  Any  other  rule  would  enslave  the 
principal  to  his  agent  by  forcing  him,  at  the  agent's 
will,  and  against  his  own  consent,  into  contracts  with 
third  parties.  But,  while  the  principal  has  this  right, 
the  exercise  of  it  may  subject  him  to  liability  to  his 
agent.  If  the  contract  of  employment  is  for  a  definite 
time,  and  the  principal,  without  cause,  revokes  the 
agent's  authority  before  that  time  arrives,  the  prin- 
cipal is  liable  to  the  agent  for  breach  of  contract;  if 
no  time  is  fixed  for  the  termination  of  the  agency,  it  is 
an  agency  at  will,  and  the  principal,  with  or  without 
cause,  may  revoke  at  any  time  without  incurring 
liability  to  his  agent.  The  acts  which  will  amount  to 
a  revocation  by  the  principal  are  various.  For  in- 
stance, if  an  agent  has  exclusive  authority  to  repre- 


COMMERCIAL    LAW  147 

sent  the  principal,  the  appointment  of  another  agent 
would  amount  to  a  revocation.  As  to  making  the 
revocation  effective,  a  revocation  operates  on  the 
agent  from  the  time  he  has  notice  of  it.  It  is  effective 
as  to  third  parties  only  when  notice  is  given  to  those 
who  have  dealt  with  the  agent  that  the  agent's  au- 
thority is  revoked.  Without  such  notice  the  prin- 
cipal does  not  escape  liability  to  third  persons  by 
reason  of  further  acts  on  his  agent's  part.  Where  an 
agent  is  appointed  in  a  particular  business,  parties 
dealing  with  him  in  that  business  have  a  right  to  rely 
upon  the  continuance  of  his  authority  until  in  some 
way  informed  of  its  revocation.  This  notice  must  be 
actual  to  those  who  have  dealt  with  the  agent,  and 
general,  as  by  publication  in  newspapers,  where  per- 
sons have  not  before  dealt  with  the  agent. 

RENUNCIATION.— The  agent  may  renounce 
his  employment  at  any  time,  but  if  he  contracted  to 
serve  for  a  certain  time,  and  renounce  before  that  time 
arrives,  he  is  liable  to  the  principal  for  breach  of  con- 
tract, unless  he  has  ground  for  renunciation,  such  as 
the  principal's  breach  of  faith  with  him.  The  sick- 
ness of  the  agent  is  a  ground  for  renouncing  the  re- 
lation, even  though  the  sickness  be  caused  by  his  own 
negligence  or  wrong.  The  principal  should  inform 
third  persons  of  the  agent's  renunciation  if  he  would 
fully  protect  himself  against  further  acts  of  the  agent. 

TERMINATION  OF  AGENCY  BY  OPERA- 
TION OF  LAW. — As  in  the  case  of  ordinary  con- 
tracts, a  contract  of  agency  may  be  terminated  by  the 
rules  of  law  upon  the  happening  of  certain  events. 


148  COMMERCIAL    LAW 

Thus,  the  destruction  of  the  subject-matter  of  the 
agency  terminates  the  relation,  if  the  parties  contem- 
plated the  continued  existence  of  the  subject-matter  as 
the  foundation  for  what  was  to  be  done.  A  change  in 
the  law,  as  the  enactment  of  a  statute  declaring  illegal 
agencies  of  a  certain  nature,  that  previously  had  been 
legal,  terminates  the  relation.  So  also  certain  changes 
affecting  the  parties  to  the  relation — i.  e.,  the  prin- 
cipal or  the  agent — effect  a  termination.  The  death 
of  the  principal  brings  the  relation  to  an  end,  and  this 
is  so  although  the  agent  had  no  notice  of  it  and  sub- 
sequently dealt  on  behalf  of  his  principal  with  third 
persons;  such  contracts  do  not  bind  the  principal's 
estate.  The  death  of  the  agent  necessarily  ends  the 
relation.  The  occurrence  of  the  principal's  insanity 
terminates  the  relation,  and  a  judicial  finding  of  in- 
sanity is  notice  to  all;  but  without  notice  of  the  in- 
sanity third  persons  who  deal  with  the  agent  in  good 
faith  are  protected.  The  bankruptcy  of  the  principal 
terminates  the  relation  as  to  all  matters  affected  by 
the  bankruptcy.  Impossibility  to  continue  the  rela- 
tion brought  about  by  restraint  of  law  terminates  the 
relation. 

IRREVOCABLE  AGENCIES.— An  agency  to 
do  an  act  touching  a  thing  in  which  the  agent  has  an 
interest,  or  in  which  he  is  subject  to  an  obligation, 
cannot  be  terminated  by  act  of  the  principal  alone. 
The  principal  cannot  terminate  the  relation  so  as  to 
leave  the  agent  under  obligations  to  third  persons, 
thereby  shifting  his  obligations  upon  the  agent;  nor 
can  he  do  so  when  the  agent  has  an  interest  in  the 


COMMERCIAL   LAW  149 

subject-matter  of  the  agency.  It  is  difficult  to  state 
concisely  what  will  constitute  such  an  interest  that 
the  principal  cannot  terminate  the  relation,  but  it 
may  be  said  to  be  some  ownership  or  right  in  the 
matter  dealt  with,  such  that  the  agent  may  deal  with 
it  in  his  own  name,  and  not  a  mere  benefit  to  be 
obtained  from  the  performance  of  the  contract  of 
agency,  as  a  commission  to  be  realized  from  sales. 
Possession  of  personal  property  with  the  right  to 
sell,  with  authority  to  apply  the  proceeds  to  a  debt 
due  from  the  principal  to  the  agent,  is  sometimes  held 
to  constitute  an  agency  coupled  with  an  interest  such 
that  the  principal  may  not  revoke  it;  on  the  other 
hand,  an  interest  arising  from  commissions  or  the 
proceeds  of  a  transaction,  is  not  an  interest  which 
will  prevent  revocation.  The  courts  carefully  exam- 
ine agencies  claimed  to  be  irrevocable  because 
coupled  with  an  interest,  and  are  inclined  to  rule 
against  them. 

MASTER  AND  SERVANT.— As  we  have  said, 
the  function  of  the  servant  is  to  perform  ministerial 
or  mechanical  acts  for  the  master.  The  chief  subject- 
matter  under  the  law  of  principal  and  agent  is  con- 
tracts, while  the  chief  subject-matter  of  the  law  of 
master  and  servant  is  tort.  The  servant,  in  perform- 
ing acts  for  his  master,  may,  inadvertently  or  wil- 
fully, cause  injury  to  a  third  person  or  to  the  prop- 
erty of  a  third  person.  The  question  arises :  What  is 
the  master's  responsibility?  We  shall  consider  this 
from  two  standpoints;  the  relationship  of  the  master 
and  servant,  inter  se  (between  themselves),  and  the 


150  COMMERCIAL    LAW 

relationship  of  the  master  and  servant  as  to  the  out- 
side world.  For  example:  the  driver  of  a  delivery 
truck,  operated  by  Lord  &  Taylor,  negligently  runs 
over  a  pedestrian.  The  truck  was  going  at  the  rate 
of  tv/enty-five  miles  an  hour,  although  the  instruc- 
tions issued  by  Lord  &  Taylor  to  all  their  servants 
is  not  to  run  cars  more  than  fifteen  miles  per  hour 
in  the  congested  parts  of  New  York  City.  Is  Lord 
&  Taylor  liable  to  the  pedestrian?  This  question  in- 
volves the  relationship  of  master  and  servant  as  to 
outside  parties.  The  same  servant,  while  operating 
the  delivery  truck  for  Lord  &  Taylor  is  run  into,  neg- 
ligently, by  a  delivery  truck  operated  by  R.  H.  Macy 
&  Co.  Is  the  master.  Lord  &  Taylor,  responsible  to 
its  servant  for  the  injury  which  he  suffers  as  the  result 
of  the  collision?  This  question  involves  the  relation- 
ship of  master  and  servant  inter  se.  We  shall  con- 
sider this  latter  relationship  first. 

THE  COMMON  LAW  GOVERNING  THE 
RELATIONSHIP  OF  MASTER  AND  SERVANT 
INTER  SE.— What  is  the  liability  of  the  master  to- 
wards the  servant  if  the  servant  is  injured?  We  shall 
see  in  the  chapter  on  torts  that  a  tort  is  defined  to  be 
a  breach  of  duty  imposed  by  law  for  which  a  suit  for 
damages  may  be  maintained.  Hence  it  follows  that 
the  master's  liability  in  tort  flows  from  a  breach  of 
duty  owed  by  him  to  his  servant.  If  there  is  no  legal 
duty,  correspondingly  there  is  no  legal  liability. 
These  legal  duties  which  the  common  law  developed 
over  a  long  period  of  years  may  be  summed  up  as 
follows:  (1)  To  provide  a  reasonably  safe  place  for 


COMMERCIAL    LAW  151 

the  servant  to  work.  (2)  To  provide  reasonably  safe, 
suitable,  and  sufficient  tools  and  appliances  with 
which  the  servant  is  to  perform  his  work.  (3)  To 
provide  reasonably  careful  and  competent  fellow 
workmen  and  in  sufficient  number  for  the  work  in 
hand.  (4)  To  warn  the  servant  of  any  unusual  dan- 
gers connected  with  the  work.  (5)  Generally  so  to 
conduct  the  work  as  not  to  expose  the  servant  to 
dangers  which  could  be  avoided  by  the  exercise  of 
reasonable  diligence.  From  the  servant's  standpoint, 
it  was  said  that  he  assumed  the  ordinary  risks  in- 
herent to  the  kind  of  business  in  which  he  was  em- 
ployed. These  rules  of  the  common  law  were  the 
outgrowth  of  conditions  surrounding  the  small  shop 
and  involving  the  use  of  simple  or  no  machinery. 
Under  modern  industrial  conditions  they  have  proved 
wholly  inadequate.  We  have  been  unduly  conserva- 
tive in  recognizing  this.  Strangely  enough  the  Work- 
men's Compensation  Acts,  with  which  we  are  now  so 
familiar,  had  their  origin  in  Germany  in  1884.  Nearly 
all  the  countries  of  continental  Europe  recognized  the 
situation  about  thirty  years  ago,  and  England  in  1897, 
and  the  United  States  within  the  last  few  years. 

THE  OBJECTION  OF  THE  COMMON  LAW 
THEORY.— Under  the  old  theory,  if  the  master  had 
observed  the  duties  which  we  have  mentioned,  he 
had  performed  his  whole  obligation  to  his  own  ser- 
vant; thus,  if  two  fellow  workmen  were  working  on 
the  twentieth  story  of  a  new  steel  skyscraper  being 
erected  by  the  Institute  Construction  Co.,  and 
through  the  carelessness  of  servant  A,  servant  B  was 


152  COMMERCIAL    LAW 

precipitated  to  the  street  and  killed,  there  would  be 
no  recovery  on  the  part  of  the  estate  of  the  deceased 
servant,  although  he  may  have  left  a  wife  and  several 
children  dependent  wholly  upon  him  for  support. 
Even  admitting  that  the  Institute  Construction  Co. 
had  exercised  due  care  in  selecting  competent  fellow 
servants  for  the  deceased  to  work  with,  and  had, 
therefore,  performed  all  of  its  obligations  on  this 
score,  nevertheless,  it  is  better,  from  the  standpoint  of 
society,  that  the  wife  and  children  of  servant  B  should 
receive  fair  compensation  rather  than  be  thrown  up- 
on the  mercy  of  the  public.  The  great  object  of  the 
Workmen's  Compensation  Act  is  to  shift  the  burden 
of  such  economic  waste  from  the  employer  to  the  in- 
dustry, in  order  that  it  may  ultimately  be  borne  by 
the  consumer  as  a  part  of  the  necessary  cost  of  con- 
struction and  production.  Thus  we  are  asking  the 
master  to  assume  a  greater  financial  responsibility 
for  injuries  to  his  servant  under  this  new  theory  than 
he  has  assumed  heretofore.  This  can  be  taken  care  of 
by  the  increased  price  he  charges  for  his  work  and 
this  in  turn  will  ultimately  pass  the  added  burden  to 
the  community  at  large. 

ILLUSTRATION.— Again,  even  if  the  servant 
did  have  a  cause  of  action  against  his  master,  because 
of  the  master's  failure  to  observe  the  common  law  re- 
quirements we  have  mentioned,  nevertheless,  the  ex- 
pense of  litigation  and  the  interminable  delays  con- 
nected with  it,  amounting  at  times  to  two  or  three 
yearsbefore  the  case  was  finally  disposed  of  by  the  court 
of  last  resort,  all  tended  to  make  litigation  for  the 


COMMERCIAL   LAW  153 

servant  all  but  impossible.  He  would  ordinarily  have 
no  money  with  which  to  begin  this  long  litigation, 
and  would  be  obliged  to  retain  the  services  of  a  law- 
yer, who  would  take  the  case  on  a  contingent  fee 
basis,  and  often  take  from  the  workman,  should  the 
decision  finally  be  in  his  favor,  a  third,  a  half,  or  even 
a  greater  portion  of  the  amount  that  he  recovers. 
Perhaps  this  was  no  greater  compensation  than  the 
lawyer  was  entitled  to  because  of  the  labor  involved 
and  the  prospect  of  no  pay  if  he  lost  the  case,  but  re- 
gardless'of  this  it  was  hard  on  the  client.  The 
Supreme  Court  of  Washington,  in  the  case  of  Stertz 
V.  The  Industrial  Insurance  Commission,  91  Wash. 
588,  has  summed  up  the  objections  against  the  whole 
system  as  follows :  "Both  had  suffered  under  the  old 
system,  the  employers  by  heavy  judgments  of  which 
half  was  opposing  lawyers'  booty,  the  workmen 
through  the  old  defenses  or  exhaustion  in  wasteful 
litigation.  Both  wanted  peace.  The  master  in  ex- 
change for  limited  liability  was  willing  to  pay  on 
some  claims  in  future  where  in  the  past  there  had 
been  no  liability  at  all.  The  servant  was  willing  not 
only  to  give  up  trial  by  jury  but  to  accept  far  less  than 
he  had  often  won  in  court,  provided  he  was  sure  to 
get  the  small  sum  without  having  to  fight  for  it.  .  .  . 
To  win  only  after  litigation,  to  collect  only  after  the 
employment  of  lawyers,  to  receive  the  sum  only  after 
months  or  years  of  delay,  was  to  the  comparatively 
indigent  claimant  little  better  than  to  get  nothing. 
The  workmen  wanted  a  system  entirely  new.  It  is 
but  fair  to  admit  that  they  had  become  impatient  with 


154  COMMERCIAL    LAW 

the  courts  of  law.  They  knew,  and  both  economists 
and  progressive  jurists  were  pointing  out,  what  is 
now  generally  conceded,  that  two  generations  ought 
never  to  have  suffered  from  the  baleful  judgments  of 
Abinger  and  Shaw." 

WORKMEN'S  COMPENSATION  ACT.— To 
meet  the  objections  we  have  just  mentioned,  the 
workmen's  compensation  act  principle  was  developed 
on  the  continent  of  Europe.  Practically  all  of  con- 
tinental Europe  had  placed  laws  of  this  character  on 
its  statute  books  before  the  end  of  the  nineteenth 
century;  in  1906  England  passed  similar  legislation, 
and  within  the  last  few  years,  we  have  adopted  the 
same  principles.  With  the  exception  of  a  few  Southern 
States,  every  State  and  territory  of  the  United  States 
has  a  Workmen's  Compensation  Act.  We  cannot 
consider  these  acts  in  detail.  The  principle  underly- 
ing them  is  the  same  throughout  the  country.  They 
are  designed  to  compensate  servants  for  "accidents'* 
"arising  out  of,"  and  "during  the  course  of"  their  em- 
ployment, and  this,  regardless  of  whether  the  servant 
was  at  fault  or  not.  The  whole  theory  of  the  common 
law  had  been  that  the  master  must  be  at  fault  in  order 
that  the  servant  may  recover.  The  new  theory  is  that 
the  community  at  large  can  better  stand  the  loss  suf- 
fered by  a  servant  than  the  individual  servant.  For 
example :  a  steel  girder  falls  upon  a  workman  engaged 
in  structural  steel  work,  through  no  fault  on  his  part 
and  also  through  no  fault  on  the  part  of  his  employer. 
Under  the  common  law,  he  would  have  to  stand  the 
loss  himself.     Under  the  Workmen's  Compensation 


COMMERCIAL    LAW  155 

Act,  such  an  event  is  an  "accident" ;  it  "arose  out  of" 
and  "in  the  course  of"  his  employment.  Therefore, 
he  is  entitled  to  a  fixed  compensation,  and  he  secures 
it  almost  immediately  through  a  workmen's  compen- 
sation bureau,  or  whatever  body  the  act  of  the  par- 
ticular State  creates  for  the  purpose  of  settling  such 
matters.  This  is  a  burden  on  the  employer,  it  is  true; 
he  was  in  no  way  to  blame.  Neither  was  the  work- 
man. The  employer  may  protect  himself  against  the 
claims  of  his  workmen  by  insurance  under  a  plan  pro- 
vided by  the  State  law,  or  if  the  State  law  does  not 
provide  for  it,  by  arrangements  with  private  compa- 
nies the  same  as  any  other  accident  insurance  is  ob- 
tained, and  by  figuring  his  cost  upon  the  particular 
job,  he  can  charge  as  a  part  of  his  operating  expense, 
the  cost  of  his  insurance  and  include  that  in  his  charge 
for  work.  The  loss  suffered  by  the  individual  work- 
men is  then  passed  to  the  community  at  large.  From 
an  economical  and  sociological  standpoint,  this  situa- 
tion is  undoubtedly  better  than  that  existing  under 
the  theory  of  the  common  law. 

THE  INTERPRETATION  OF  WORKMEN'S 
COMPENSATION  ACTS.— Although  these  acts 
are  comparatively  new  in  this  country,  there  has  been 
a  great  amount  of  litigation,  and  it  is  not  practical  to 
enter  into  a  discussion  of  all  the  close  questions  which 
are  raised  in  interpreting  such  acts.  A  vast  amount 
of  the  litigation  has  been  concerned  with  the  inter- 
pretation of  the  three  expressions,  common  to  almost 
all  the  acts,  "accident"  "arising  out  of"  and  "during 
the  course  of."  While  the  courts  have  shown  a  broad- 


156  COMMERCIAL   LAW 

minded  spirit  in  interpreting  these  expressions,  it  is 
undoubtedly  true  that  some  decisions  will  suggest 
further  legislation  in  order  to  correct  certain  evils 
which  exist  at  the  present  time.  For  example,  in  de- 
fining the  term  "accident,"  the  leading  English  case 
said :  "The  expression  'accident'  is  used  in  the  public 
and  ordinary  sense  of  the  word,  as  denoting  an  un- 
looked-for event  which  is  not  expected  or  designed." 
And  Judge  Siebecker  of  Wisconsin  says  "accidental" 
contemplates  "an  event  not  within  one's  foresight  and 
expectation,  resulting  in  a  mishap  causing  injury  to 
the  employee,"  and  Mr.  Justice  Pound  of  New  York 
says  that  the  statute  contemplates  injuries  "not  ex- 
pected or  designed  by  the  workman  himself."  To 
illustrate:  A  window-dresser  is  decorating  the  win- 
dow in  Woolworth's.  He  swallows  a  pin.  This  is 
an  "accident"  within  the  contemplation  of  the  act, 
and  entitles  him  to  recovery.  Again,  a  workman  is 
employed  in  a  white-lead  factory.  During  his  six 
months  period  of  service  in  the  factory,  he  contracts 
tuberculosis.  This  is  not  an  "accident"  because  you 
must  be  able  to  put  your  finger  upon  a  definite  time 
when  the  unlooked-for  event  happened.  This  leads 
us  to  the  general  statement  that  Workmen's  Com- 
pensation Acts  in  this  country,  as  at  present  drawn, 
do  not  generally  cover  occupational  diseases.  Sep- 
arate legislation  is  undoubtedly  desirable  to  extend 
the  principle  in  such  cases,  for  if  it  is  sound  that  the 
window-dresser  in  Woolworth's  should  recover,  it 
should  be  equally  sound  that  the  workman  who  con- 
tracted tuberculosis  should  recover.    Again,  the  other 


COMMERCIAL   LAW  157 

two  expressions  "arising  out  of,"  and  "during  the 
course  of"  have  caused  much  litigation.  Perhaps  the 
most  satisfactory  statement  about  these  expressions 
is  in  the  leading  Massachusetts  case,  In  re  McNicol, 
215  Mass.  497.  Here  the  court  says:  "The  injury 
must  both  arise  'out  of  and  also  be  received  *in  the 
course  of  the  employment.  Neither  alone  is  enough. 
It  is  not  easy  *  *  *  ^q  give  a  comprehensive  defini- 
tion of  these  words.  *  *  *  An  injury  is  received  'in 
the  course  of  the  employment  when  it  comes  while 
the  workman  is  doing  the  duty  which  he  is  employed 
to  perform.  It  'arises  out  of  the  employment,  when 
there  is  *  *  *  a  causal  connection  between  the  con- 
ditions under  which  the  work  is  required  to  be  per- 
formed and  the  resulting  injury.  *  *  *  jf  ^j^g  injury 
can  be  seen  *  *  *  to  have  been  contemplated  by  a 
reasonable  person  familiar  with  the  whole  situation, 
*  *  *  then  it  arises  'out  of*  the  employment.  *  *  * 
The  causative  danger  must  be  peculiar  to  the  work 
and  not  common  to  the  neighborhood.  *  *  *  j^  need 
not  have  been  foreseen  or  expected,  but  after  the 
event  it  must  appear  to  have  had  its  origin  in  a  risk 
connected  with  the  employment,  and  to  have  flowed 
from  that  source  as  a  rational  consequence."  An  il- 
lustration will  show  how  these  phrases  are  applied. 
The  janitor  of  a  building  is  alone  in  the  building.  An 
old  enemy  who  has  not  seen  him  for  years,  learns  his 
whereabouts,  comes  into  the  building,  shoots  him  in 
the  leg,  causing  him  to  have  it  amputated.  Is  the  mas- 
ter liable?  It  is  an  "accident,"  and  clearly  it  arose  "dur- 
ing the  course  of"  employment,  but  did  it  arise  "out 


158  COMMERCIAL    LAW 

of"  his  employment?  Manifestly  not.  The  guilty 
party  would  have  shot  the  man  had  he  met  him  in 
Central  Park,  or  any  other  place.  It  was  purely  per- 
sonal vengeance  on  his  part  which  caused  the  act.  The 
night  watchman  in  a  bank  is  shot  by  a  robber  at  night 
in  the  bank,  while  on  duty.  May  he  recover  from  his 
master?  Clearly  he  can.  It  is  an  "accident."  It  arose 
"during  the  course  of"  his  employment,  it  arose  "out 
of"  his  employment  also,  because  the  robber  would 
not  have  shot  him  were  he  not  in  the  bank  as  a  watch- 
man, standing  between  the  robber  and  the  accomplish- 
ment of  his  purpose,  the  securing  of  money  from  the 
bank. 

THE  RELATIONSHIP  OF  MASTER  AND 
SERVANT  AS  RELATING  TO  OUTSIDE 
PARTIES. — If  the  relationship  of  master  and  servant 
exists,  the  question  arises,  is  the  master  responsible 
for  the  torts  committed  by  his  servant,  resulting  in 
injury  to  third  parties?  It  is,  of  course,  essential  that 
the  wrongdoer  must  be  the  defendant's  servant.  It 
does  not  follow  that  a  wrongdoer  is  the  defendant's 
servant  simply  because  of  a  certain  relationship,  as 
that  of  parent  and  child,  husband  and  vAie,  or  em- 
ployer and  employee.  Within  the  last  few  years,  a 
great  number  of  automobile  cases  have  been  decided 
by  the  courts,  and  they  are  commonly  spoken  of  as  the 
"family  automobile  cases."  To  illustrate :  I  own  a  car 
which  is  used  by  the  various  members  of  my  family. 
My  son,  while  running  the  car,  for  his  own  pleasure, 
negligently  runs  over  some  one.  Am  I  responsible? 
Grantinp^  the  relationship  of  parent  and  child,  that 


COMMERCIAL    LAW  159 

would  not  constitute,  per  se  (of  itself),  the  relation- 
ship of  master  and  servant.  The  injured  man  would 
have  to  show  more  than  I  have  indicated  in  order  to 
entitle  him  to  recover  for  my  son's  negligence.  Were 
members  of  my  family  in  the  car,  being  taken  out  for  a 
ride  by  my  son,  I  would  be  liable.  Again,  my  wife,  in 
discharging  a  servant,  assaults  her.  Should  the  mere 
fact  of  the  relationship  of  husband  and  wife  make  me 
liable  on  the  theory  of  master  and  servant?  Clearly 
not.  Again,  I  employ  John  Smith  as  my  chauffeur.  I 
never  operate  my  car  on  Sunday.  John  Smith,  who 
lives  in  the  town  adjoining  mine,  is  moving,  and  asks 
if  he  may  borrow  my  car  over  Sunday  to  assist  in  the 
moving  operations.  While  using  the  car  for  that  pur- 
pose, he  negligently  runs  over  some  one.  Am  I  liable? 
Clearly  not,  for,  although  the  relationship  of  master 
and  servant  exists  between  me  and  my  servant  at  the 
time  he  did  the  injury,  he  was  not  acting  for  me  as  a 
servant.  What  is  the  rule  to  be  applied  to  answer  such 
questions? 

THE  SERVANT  MUST  BE  ENGAGED  IN 
HIS  MASTER'S  BUSINESS.— It  is  clear  from  the 
foregoing  that,  in  order  to  make  the  master  liable,  the 
servant  must  be  engaged  in  his  master's  business,  and 
he  must  be  acting  within  the  scope  of  his  employment. 
The  New  York  case  of  Rounds  v.  The  Delaware,  etc.. 
Railroad,  64  N.  Y.  129,  states  the  general  rule:  "For 
the  acts  of  the  servant,  within  the  general  scope  of 
his  employment,  while  engaged  in  his  master's  busi- 
ness, and  done  with  a  view  to  the  furtherance  of  that 
business  and  the  master's  interest,  the  master  will  be 


160  COMMERCIAL   LAW 

responsible  whether  the  act  be  done  negligently,  wan- 
tonly, or  even  wilfully."  The  Court  of  Errors  and  Ap- 
peals of  New  Jersey  recently  said  in  Holler  v.  Sanford 
Ross,  68  N.  J.  Law,  324:  *'The  Supreme  Court  of  Con- 
necticut states  the  rule  applicable  to  this  class  of  cases 
about  as  clearly  as  it  can  be  done,  when  it  says :  *For 
all  acts  done  by  a  servant  in  obedience  to  the  express 
orders  or  direction  of  the  master,  or  in  the  execution 
of  the  master's  business,  within  the  scope  of  his  em- 
ployment, and  for  acts  in  any  sense  warranted  by  the 
express  or  implied  authority  conferred  upon  him,  con- 
sidering the  nature  of  the  service  required,  the  instruc- 
tions given  and  the  circumstances  under  which  the  act 
is  done,  the  master  is  responsible ;  for  acts  which  are 
not  within  these  conditions,  the  servant  alone  is  re- 
sponsible.' " 

LIABILITY  OF  A  PUBLIC  AGENCY  FOR 
THE  NEGLIGENT  ACTS  OF  ITS  AGENTS.— It 
is  an  old  saying  that  "the  King  can  do  no  wrong." 
This  principle  of  the  English  common  law  we  have 
applied  in  this  country,  and  the  Federal  Government 
cannot  be  sued  unless  it  gives  its  consent.  While  the 
Court  of  Claims  has  been  established,  Congress  has 
generally  provided  that  suits  may  be  brought  against 
the  Federal  Government  only  in  contract  actions,  and 
not  in  tort  actions,  so  that  ordinarily,  if  a  person  is 
injured  through  the  negligence  of  an  employee  of  the 
Federal  Government,  he  may  not  recover  against  that 
Government.  Thus,  my  only  remedy  in  case  of  an 
injury,  received  through  the  negligent  operation  of  an 
elevator  in  a  post-office  building  owned  by  the  Gov- 


COMMERCIAL    LAW  161 

ernment,  would  be  the  passing  of  special  legislation  by 
Congress  compensating  me.  I  would  have  no  right  to 
sue  the  United  States  for  such  injury.  The  same  gen- 
eral principles  are  applied  to  the  State  governments. 
In  regard  to  cities,  the  rule  may  be  generally  stated  to 
be  that  a  municipality  is  not  liable  for  the  negligence 
of  its  servants  in  those  departments  operated  by  the 
municipality  in  its  governmental  activities,  as  distin- 
guished from  its  administrative  activities,  in  which 
case  it  is  liable.  Thus,  a  city  is  not  responsible  for  the 
negligence  of  its  policemen  or  its  firemen,  although 
injury  results  from  their  negligence,  these  depart- 
ments being  examples  of  governmental  activities  of 
a  municipality,  while  the  city  would  be  liable,  gener- 
ally, for  the  negligence  of  the  employees  of  its  water 
department,  this  being  an  illustration  of  its  adminis- 
trative activities.  It  is  also  generally  held  that  public 
charities,  such  as  hospitals,  and  the  like,  are  not  liable 
for  torts  committed  by  their  servants,  provided  they 
have  used  reasonable  care  in  the  selection  of  their 
servants. 

INDEPENDENT  CONTRACTORS.—A  dis- 
tinction must  be  made  between  one  whom  we  call  an 
independent  contractor  and  a  master.  When  A  de- 
sires a  particular  piece  of  work  done,  he  has  two 
options  as  to  doing  it.  He  may  either  hire  a  workman 
to  do  it,  retaining  control  of  the  workman,  and  telling 
him  how  he  shall  do  it,  or  he  may  let  the  work  by  con- 
tract, simply  stipulating  that  it  shall  be  done  in  accor- 
dance with  plans  and  specifications  which  his  archi- 
tect has  drawn  up.    He  retains  no  control  over  the 


162  COMMERCIAL   LAW 

contractor  or  over  his  method  of  work.  His  sole  in- 
terest here  is  to  have  the  piece  of  work  turned  over 
to  him  in  its  completed  state.  In  the  first  case,  we  call 
the  workman  a  servant;  in  the  second  case,  he  is  an 
independent  contractor.  One  who  employs  an  inde- 
pendent contractor  is  not  liable  for  the  negligent  acts 
of  the  contractor  or  his  servants,  except  in  a  few  spe- 
cial cases.  In  Berg  v.  Parsons,  156  N.  Y.  109,  the 
majority  of  the  court  states:  ''There  are  certain  excep- 
tional cases  where  a  person  employing  a  contractor  is 
liable,  which,  briefly  stated,  are:  "Where  the  employer 
personally  interferes  with  the  work,  and  the  acts  per- 
formed by  him  occasion  the  injury;  where  the  thing 
contracted  to  be  done  is  unlawful ;  where  the  acts  per- 
formed create  a  public  nuisance;  and  where  an  em- 
ployer is  bound  by  a  statute  to  do  a  thing  efficiently 
and  an  injury  results  from  its  inefficiency."  A  few, 
but  not  many  courts,  add  to  this  list  one  further  fact, 
that  the  emplo3/er  must  use  due  care  in  the  selection 
of  a  competent  independent  contractor,  otherwise  he 
is  liable.    This  would  seem  eminently  sound. 


CHAPTER  V 


Partnership 

RELATIONS  ANALOGOUS  TO  PRINCIPAL 
AND  AGENT.— There  are  a  few  relations,  in 
the  law,  which  are  analogous  to  that  of  prin- 
cipal and  agent.  The  one  which  we  shall  take  up  now 
is  the  relationship  of  a  partner  to  a  partnership,  and 
also  to  the  outside  world.  We  shall  consider  in  a  sub- 
sequent chapter,  the  functions,  duties  and  responsibil- 
ities of  trustees,  executors,  and  administrators. 

THE  IMPORTANCE  OF  PARTNERSHIP 
LAW.— There  is  a  very  common  impression  that 
partnership  law  is  not  as  important  now  as  formerly. 
This  undoubtedly  is  true,  as  more  and  more  large 
business  enterprises  are  being  conducted  in  the  cor- 
poration form;  but  there  is  still  a  large  amount  of 
business  done  in  the  partnership  form.  What  is 
most  important,  however,  is  the  very  infor- 
mality of  the  type  of  business  conducted  under 
the  partnership  arrangement.  "Whether,  in  a  given 
case,  a  partnership  exists,  becomes  a  vital  ques- 
tion. Two  friends,  A  and  B,  in  an  informal  way, 
go  into  a  business  venture.  The  enterprise  fails  and 
A  and  B  owe  many  debts.  A  has  some  property  of 
his  own;  B  has  nothing.  You  are  a  creditor,  but  all 
your  dealings  have  been  with  B.  One  simple  point 
will  show  you  whether  your  claim  is  worthless.  If 
A  and  B  were  partners,  you  may  hold  A,    If  they 

163 


164  COMMERCIAL    LAW 

were  not  partners,  your  claim  probably  never  will  be 
worth  anything  to  you.  The  question,  then,  whether 
or  not  a  certain  relationship  constitutes  a  partner- 
ship is  a  most  important  one,  in  the  field  of  commer- 
cial law. 

PARTNERSHIP  DEFINED.— We  shall  have 
occasion,  in  the  chapters  on  bills  and  notes,  and  per- 
sonal property,  to  refer  to  the  movement  to  codify 
certain  branches  of  the  law.  This  movement  was 
begun  by  the  Commissioners  on  Uniform  Laws  pro- 
posing the  Uniform  Negotiable  Instruments  Act, 
which  has  now  been  adopted  in  all  of  the  States  except 
Georgia.  One  of  the  most  recent  codifications  is  the 
Uniform  Partnership  Act  which  has  been  adopted  in 
a  number  of  the  States,  and  which  will  undoubtedly 
follow  the  same  course  as  the  other  acts  drawn  by  the 
same  Commissioners.  We  shall  make  frequent  refer- 
ence to  the  Uniform  Partnership  Act  in  this  chapter. 
Although  some  of  the  writers  on  the  law  of  partner- 
ship state  that  no  satisfactory  definition  of  the  term 
partnership  can  be  given,  the  Uniform  Act  defines  it 
as  follows:  "A  partnership  is  an  association  of  two 
or  more  persons  to  carry  on  as  co-owners  a  business 
for  profit."  It  is  undoubtedly  true  that  even  with 
this  definition,  a  considerable  amount  of  further  ex- 
planation will  be  necessary  to  determine  with  any  de- 
gree of  certainty,  just  what  is  meant  by  partner- 
ship. 

THE  DIFFERENCE  BETWEEN  A  PART- 
NERSHIP AND  A  CORPORATION.— While  we 
may  be  anticipating  our  chapter  on  corporations,  it 


COMMERCIAL    LAW  165 

is  well,  at  the  very  outset,  to  understand  the  funda- 
mental differences  between  a  partnership  and  a  cor- 
poration.   We  may  mention  six  differences: 

(1)  When  a  partner  dies,  the  partnership  is  auto- 
matically dissolved.  If  a  partner  sells  or  transfers 
his  interest  in  the  business,  this  works  a  dissolution 
of  the  firm.  On  the  other  hand,  the  situation  is  pre- 
cisely the  opposite  in  the  case  of  a  corporation.  The 
death  of  a  shareholder  has  no  effect  upon  the  cor- 
poration. In  fact,  if  all  of  the  shareholders  of  the 
United  States  Steel  Corporation  should  die  at  once, 
the  corporation  would  still  exist.  So  also  the  transfer 
of  stock  from  one  owner  to  another  has  no  effect  upon 
the  corporation's  existence.  Many  thousand  shares 
are  dealt  with  on  the  exchange  each  day  without  the 
slightest  effect  upon  any  corporation. 

(2)  The  doctrine  of  individual  liability  for  the 
debts  of  a  firm  is  a  fundamental  characteristic  of 
partnership  law.  Each  member  of  the  firm  is  abso- 
lutely liable  for  all  the  debts  of  the  firm.  Thus,  if 
the  firm  consists  of  A,  B,  and  C,  and  the  firm  goes 
into  bankruptcy  and  owes  $50,000,  and  B  and  C  are 
both  individually  worthless,  and  A  has  his  own  pri 
vate  fortune,  A  will  be  obliged  to  pay  all  of  the  debts, 
although,  according  to  the  arrangements  that  the 
partners  made  when  forming  the  partnership,  each 
was  to  share  the  profits  and  losses  equally.  Theoret- 
ically, A  has  the  right  to  contribution  from  his  fellow 
partners,  and  should  they  later  acquire  property,  he 
will  be  able  to  enforce  this  right  in  a  court  of  equity. 
In  a  corporation,  a  shareholder  is  liable  only  for  the 


166  COMMERCIAL    LAW 

value  of  his  share.  If  he  subscribes  to  a  share  of  stock, 
par  value  $100,  and  has  paid  only  $50  on  his  sub- 
scription, and  the  corporation  goes  into  bankruptcy, 
its  receiver  can  compel  him  to  pay  the  balance  of  his 
subscription,  $50,  but  that  would  be  the  extent  of 
his  loss.  If  I  buy  a  share  of  United  States  Steel 
Common,  at  $79,  on  the  exchange,  and  the  compan}' 
goes  into  bankruptcy,  my  loss  v^ill  be  only  $79.  I 
would  not  be  obliged  to  make  up  to  the  receiver  the 
other  twenty-one  dollars.  The  only  noteworthy  ex- 
ception to  this  rule  as  to  the  liability  of  a  stockholder 
is  in  the  case  of  a  shareholder  in  a  National  bank, 
(this  is  true  of  some  of  the  State  banking  laws  also), 
where  a  shareholder  is  liable  to  an  extra  assessment 
equal  to  the  par  value  of  the  stock  he  owns. 

(3)  In  a  partnership  each  member  of  the  firm  is 
a  general  agent  for  the  partnership,  and  his  acts  bind 
the  firm.  In  the  case  of  a  corporation,  a  shareholder, 
by  virtue  of  the  fact  that  he  is  a  shareholder,  has  no 
power  to  bind  the  corporation.  The  position  of  a 
shareholder  is  very  similar  to  that  of  a  voter.  The 
corporation  is  run  by  its  board  of  directors.  They 
are  elected  by  the  shareholders  just  as  we  elect  a 
governor  or  president.  If  we  are  dissatisfied  with 
the  conduct  of  a  governor  or  president,  all  we  can  do 
is  to  vote  him  out  of  office  at  the  next  election,  except 
in  unusual  cases  where  a  governor  or  president  might 
be  impeached.  The  same  is  true  in  the  case  of  a 
board  of  directors. 

(4)  A  partnership  may  be  created  by  a  formal 
contract,  or  a  simple  contract,  in  writing  or  by  word 


COMMERCIAL    LAW  167 

of  mouth ;  in  fact  it  may  be  created  in  almost  any  way. 
A  corporation,  in  order  to  do  business,  mxust  comply 
with  the  corporation  lav/s  of  the  State  in  v/hich  it  is 
incorporated.  A  regular  formality  must  be  observed. 
A  certificate  of  incorporation  must  be  filed,  generally 
with  the  Secretary  of  State,  and  with  the  county  clerk 
of  the  county  in  which  the  corporation's  principal 
place  of  business  is  located  in  the  State. 

(5)  A  partnership  may  do  anything  that  is  legal 
and  which  the  members  decide  to  do.  A  corporation 
exists  by  virtue  of  a  charter,  granted  by  the  State. 
The  sum  total  of  the  powers  given  in  that  charter 
gives  the  total  of  all  of  the  activities  the  corporation 
may  undertake.  Engagement  in  activities  not  author- 
ized in  the  charter  may  result  in  the  forfeiture  of  the 
charter  by  the  State. 

(5)  In  legal  theory,  a  corporation  is  looked  upon 
as  a  separate  entity.  Most  States  require  at  least 
three  persons  to  incorporate.  A,  B  and  C  form  a 
corporation  under  the  laws  of  the  State  of  New  York. 
There  are  then  four  legal  persons  in  existence :  A,  B, 
and  C,  and  this  separate  person,  or  legal  entity,  the 
Green  Corporation,  if  that  is  the  name  given  the  com- 
pany. In  the  case  of  a  partnership,  the  law  does  not, 
as  a  rule,  consider  the  partnership  as  an  entity  dis- 
tinct and  separate  from  the  members  who  make  up 
the  firm.  Of  course,  the  business  man  does,  in  a  way, 
look  upon  the  partnership  as  a  separate  commercial 
entity.  The  very  fact  that  the  members  of  the  firm 
are  all  general  agents  for  the  firm,  and  that  the  mem- 
bers are  individually  liable  for  all  of  the  debts  of  the 


168  COMMERCIAL    LAW 

firm,  shows  that  the  law  does  not  carry  the  entity 
theory  into  practice  in  partnerships  as  it  does  in  cor- 
porations. 

DIFFERENT  KINDS  OF  PARTNERSHIP.— 
What  we  have  said  appHes  to  the  ordinary  partner- 
ship. There  are  certain  forms  of  partnership  which 
we  can  only  mention.  One  of  them  is  the  limited 
partnership.  Limited  partnerships  are  created  under 
the  law  of  the  State  in  which  the  business  is  to  be 
conducted  and  in  a  general  way,  these  limited  part- 
nerships are  a  combination  of  the  principles  under- 
lying ordinary  partnerships  and  corporations.  The 
members  may  limit  their  liability  to  a  certain  amount, 
and  in  that  sense,  the  limited  partnership  is  like  a  cor- 
poration. On  the  other  hand,  the  general  principles 
of  partnership,  as  we  shall  discuss  them,  apply  with 
almost  equal  force  to  the  acts  of  a  limited  partnership. 
A  person  should  not  undertake  to  give  an  opinion  as 
to  a  legal  problem  relating  to  a  limited  partnership 
until  the  law  of  the  State  in  which  the  limited  part- 
nership is  organized  has  been  consulted. 

JOINT  STOCK  COMPANIES.— Occasionally 
we  meet  with  organizations — joint  stock  companies — 
which  occupy  a  sort  of  "No-man's  land"  between 
partnerships  and  corporations.  The  joint  stock  com- 
pany issues  shares  of  stock  the  same  as  a  corporation. 
These  shares  are  listed  on  the  stock  exchange,  as  for 
example,  the  Adams  Express  Company.  The  joint 
stock  company,  however,  carries  with  it  the  individual 
liability  of  the  shareholders  for  the  debts  of  the  com- 
pany, which  is  technically  a  partnership  attribute. 


COMMERCIAL    LAW  169 

The  New  York  Court  of  Appeals  in  People  ex  rel. 
Winchester  v.  Coleman,  133  N.  Y.  279,  has  put  it  this 
way:  "More  or  less,  they  crowd  upon  and  overlap 
each  other,  but  without  losing  their  identity,  and  so, 
while  we  cannot  say  that  a  joint  stock  company  is  a 
corporation,  we  can  say  *  *  *  that  the  joint  stock 
company  is  a  partnership  with  some  of  the  powers  of 
a  corporation/* 

HOW  TO  DETERMINE  WHETHER  A 
PARTNERSHIP  EXISTS.— In  a  case,  not  tried  in 
court,  the  facts  were :  A  Gloucester  cod-fishing  vessel 
made  an  unsuccessful  fishing  voyage.  The  sailors 
were  to  secure  a  certain  portion  of  the  profits  of  the 
voyage  as  their  wages.  When  the  ship  returned  to 
port,  an  attempt  was  made  to  collect  bills  incurred  on 
the  trip  and  to  hold  the  seamen  liable  along  with  the 
owners  of  the  vessel,  as  partners.  It  was  contended 
that  sharing  in  the  profits  made  them  partners.  While 
this  is  true  generally,  this  particular  custom,  whereby 
a  laborer  receives  a  certain  portion  of  the  profits  of 
an  undertaking  as  his  wages,  does  not  of  itself  con- 
stitute him  a  partner  with  the  person  operating  the 
vessel.  This  point  has  been  decided  several  times. 
Such  questions  as  these  arise  and  cause  great  diffi- 
culty in  determining  whether  a  partnership  exists. 
At  times  it  is  very  important,  as  in  the  case  of  the 
seamen,  to  know  whether  or  not  they  can  be  made 
to  assume  the  obligations  pertaining  to  the  partner- 
ship relations.  While  we  cannot  go  into  these  rela- 
tions in  detail,  the  framers  of  the  Uniform  Partner- 
ship Act  have  laid  down,  with  the  utmost  care,  the 


170  COMMERCIAL    LAW 

rules  which  are  to  be  used  in  determining  whether  a 
partnership  exists  or  not.  But,  you  say,  why  cannot 
the  parties  avoid  all  this  difficulty  by  making  a 
written  agreement  clearing  up  the  entire  matter? 
They  could.  It  is  the  simplest  matter  in  the  world. 
But  the  trouble  comes  because  a  partnership  arrange- 
ment is  so  easy  to  enter  into,  and  requires  so  little 
formality,  that  it  is  taken  for  granted  that  it  will  come 
out  satisfactorily,  and  the  precautions  which  should 
be  taken  are  sometimes  forgotten.  Hence,  we  have 
to  have  rules  of  interpretation  to  help  us  when  the 
parties  themselves  have  not  taken  the  necessary  pre- 
cautions to  make  matters  clear.  These  rules  of  in- 
terpretation are  very  clearly  and  very  definitely  laid 
down  in  the  Uniform  Partnership  Act,  in  the  follow- 
ing language: 

(1)  Except  as  provided  by  Section  16,  persons 
who  are  not  partners  as  to  each  other  are  not  partners 
as  to  third  persons. 

(2)  Joint  tenancy,  tenancy  in  common,  tenancy 
by  the  entireties,  joint  property,  common  property, 
or  part  ownership  does  not  of  itself  establish  a  part- 
nership, whether  such  co-owners  do  or  do  not  share 
any  profits  made  by  the  use  of  the  property. 

(3)  The  sharing  of  gross  returns  does  not  of 
itself  establish  a  partnership,  whether  or  not  the  per- 
sons sharing  them  have  a  joint  or  common  right  or 
interest  in  any  property  from  which  the  returns  are 
derived. 

(4)  The  receipt  by  a  person  of  a  share  of  the 
profits  of  a  business  is  prima  facie  evidence  that  he 


COMMERCIAL    LAW  171 

is  a  partner  in  the  business,  but  no  such  inference 
shall  be  drawn  if  such  profits  were  received  in  pay- 
ment : 

(a)  As  a  debt  by  installments  or  otherwise, 

(b)  As  wages  of  an  employee  or  rent  to  a  land- 
lord, 

(c)  As  an  annuity  to  a  widow  or  representative 
of  a  deceased  partner, 

(d)  As  interest  on  a  loan,  though  the  amount  of 
payment  vary  with  the  profits  of  the  business, 

(e)  As  the  consideration  for  the  sale  of  the  good- 
will of  a  business  or  other  property  by  installments 
or  otherwise. 

Section  16. — (Partner  by  estoppel.) — (1)  When 
a  person  by  words  spoken  or  written  or  by  conduct, 
represents  himself,  or  consents  to  another  represent- 
ing him  to  any  one,  as  a  partner  in  an  existing  part- 
nership or  with  one  or  more  persons  not  actual  part- 
ners, he  is  liable  to  any  such  person  to  whom  such 
representation  has  been  made,  who  has,  on  the  faith 
of  such  representation,  given  credit  to  the  actual  or 
apparent  partnership,  and  if  he  has  made  such  repre- 
sentation or  consented  to  its  being  made  in  a  public 
manner,  he  is  liable  to  such  person,  whether  the  repre- 
sentation has  or  has  not  been  made  or  communicated 
to  such  person  *  *  *. 

FOR  WHAT  PURPOSES  MAY  A  PARTNER- 
SHIP BE  CREATED.— A  partnership  may  be 
created  to  carry  on  any  lawful  business,  and  whatever 
the  individuals  may  do  lawfully  as  such,  two  or  more 
may  do  together  in  a  group  as  a  partnership.    Pro- 


172  COMMERCIAL    LAW 

fessional  occupations  may  be  carried  on  in  the  part- 
nership form  advantageously.  This  is  one  case  where 
a  partnership  has  an  advantage  over  a  corporation. 
A  group  of  lawyers  may  form  a  partnership  and  do 
business  under  a  partnership  name.  But  a  group  of 
lawyers  seldom  or  never  form  corporations  to  prac- 
tice law.  The  reason  for  this  is  that  the  corporation 
is  a  separate  entity,  and  the  corporation  as  such  can- 
not pass  a  bar  examination  and  be  admitted  to  the 
bar.  In  fact,  in  a  few  States,  there  are  statutes  pro- 
hibiting a  corporation  from  practicing  law.  There 
is,  therefore,  very  little  advantage  in  creating  a  cor- 
poration which  cannot  itself  do  the  thing  for  which  it 
was  created. 

ILLEGAL  OBJECT.— A  partnership  which  is 
formed  to  carry  on  any  illegal  purpose  is,  of  course, 
not  recognized  by  law.  Thus,  if  A,  B,  and  C  form  a 
partnership  to  engage  in  the  gambling  business  and 
they  elect  C  as  treasurer  and  have  a  successful  busi- 
ness so  that  they  have  a  large  amount  of  money  on 
hand,  A  and  B  may  not  be  able  to  reap  the  profits  of 
the  venture.  C  has  the  money.  The  agreement  was 
that  all  were  to  share  equally,  but  C  insists  on  keep- 
ing it  all.  The  law  will  allow  him  to  do  so,  because 
it  is  beneath  the  dignity  of  the  court  to  order  an 
accounting  in  a  transaction  where  all  parties  are 
equally  guilty.  The  maxim  is  "in  pari  delicto,  con- 
dicio  defendentis  potior  est",  that  is,  where  the  parties 
are  in  equal  fault,  the  position  of  the  defendant  is  the 
stronger.  C,  the  guilty  party,  has  the  money;  he  is 
the  defendant,  therefore,  he  keeps  it. 


COMMERCIAL   LAW  173 

WHO  MAY  BE  PARTNERS.— At  common 
law,  a  married  woman  was  incapable  of  becoming  a 
member  of  a  partnership  because  of  her  general  in- 
capacity to  enter  a  contract.  Statutes  removing  the 
disability  of  married  women  have  been  passed  in  prac- 
tically all  the  States,  and  a  married  woman  is  gen- 
erally free  to  become  a  partner,  except,  and  this  is 
true  in  many  States  still,  husband  and  wife  may  not 
become  partners.  An  infant  may  be  a  member  of  a 
firm  on  the  same  general  principles  as  applied  to  ordi- 
nary infant's  contracts.  His  entering  the  partner- 
ship agreement  is  not  void,  but  voidable.  When  he 
becomes  of  age,  if  he  afBrms  the  contract  of  partner- 
ship, he  will  be  liable  the  same  as  an  adult.  He  has, 
however,  the  right  to  disaffirm  his  partnership  agree- 
ment within  a  reasonable  time  after  becoming  of  age, 
and  if  he  does  so,  he  will  be  absolved  from  all  per- 
sonal liability  for  the  debts  of  the  firm.  It  is  very 
generally  held  that  a  corporation  may  not  enter  into 
a  copartnership  with  another  corporation  or  an  indi- 
vidual. The  reason  for  this  is  a  general  rule  of  public 
policy  that  in  a  partnership  the  corporation  would  be 
bound  by  the  acts  of  persons  who  are  not  its  duly 
appointed  agents  and  officers.  There  may  be  any 
number  of  members  in  a  firm,  such  matters  being  left 
to  the  choice  and  wisdom  of  those  operating  the  busi- 
ness. 

DELECTUS  PERSONARUM.  — While  the 
foregoing  is  true,  one  must  not  reach  the  conclusion 
that  an  objectionable  person  may  be  forced  into  a 
firm.    I  am  a  member  of  a  firm  of  three  persons.    I 


174  COMMERCIAL   LAW 

decide  to  withdraw,  and  tell  my  two  fellow  partners 
that  I  have  transferred  all  my  interest  in  the  firm  to 
John  Jones.  He  will  take  my  place.  My  two  fellow 
partners  believe  Jones  to  be  a  crook,  and  do  not  wish 
to  be  in  partnership  with  him.  They  would  not  be 
obliged  to  accept  him.  In  other  words,  the  doctrine 
of  delectus  personarum,  or  the  choice  of  the  person, 
is  strictly  applied  in  partnership,  because  a  partner- 
ship relation  is  a  very  confidential  relationship.  Ordi- 
narily the  business  cannot  be  conducted  satisfactorily 
unless  all  of  the  partners  have  the  confidence  of  each 
other.  It  is  for  this  reason,  that  we  have  the  rule, 
heretofore  referred  to,  that  the  sale  by  a  partner  of 
his  interest  in  the  business  works  a  dissolution  of  the 
partnership.  John  Jones,  who  purchased  my  rights 
in  the  firm,  could  not  compel  the  other  members  to 
take  him  in,  but  the  firm  would  have  to  be  wound  up 
and  he  would  simply  be  able  to  recover  what  my  share 
of  the  assets  was.  It  is  true  that  Section  27  of  the 
Act  does  read  that  a  sale  by  a  partner  of  his  interest 
does  not  of  itself  work  a  dissolution,  but  the  doctrine 
of  delectus  personarum  is  fully  preserved.  That  sec- 
tion reads:  (1).A  conveyance  by  a  partner  of  his 
interest  in  the  partnership  does  not  of  itself  dissolve 
the  partnership,  nor,  as  against  the  other  partners  in 
the  absence  of  agreement,  entitle  the  assignee,  during 
the  continuance  of  the  partnership,  to  interfere  in  the 
management  or  administration  of  the  partnership 
business  or  affairs,  or  to  require  any  information  or 
account  of  partnership  transactions,  or  to  inspect  the 
partnership  books ;  but  it  merely  entitles  the  assignee 


COMMERCIAL    LAW  175 

to  receive  in  accordance  with  his  contract  the  profits 
to  which  the  assigning  partner  would  otherwise  be 
entitled. 

(2)  In  case  of  a  dissolution  of  the  partnership, 
the  assignee  is  entitled  to  receive  his  assignor's  inter- 
est and  may  require  an  account  from  the  date  only  of 
the  last  account  agreed  to  by  all  the  partners. 

ARTICLES  OF  PARTNERSHIP.— We  have 
learned  that  parties  need  not  expressly  declare  them- 
selves partners,  or  enter  into  an  express  contract,  in 
order  to  become  partners.  So  the  framing  of  written 
partnership  articles — a  written  contract  of  partner- 
ship— is  not  essential,  though  it  is  the  ordinary  and 
advisable  course.  We  may  note  here  a  few  rules  gov- 
erning the  use  and  construction  of  such  articles  where 
they  have  been  adopted.  They  should,  of  course,  pro- 
vide for  as  m^any  contingencies  as  can  be  foreseen, 
such  as  the  nature,  name  and  place  of  business,  when 
the  relation  is  to  commence  and  when  to  terminate, 
what  capital  shall  be  contributed  by  each,  what  the 
share  of  each  in  the  profits  and  losses  shall  be,  what 
the  powers  of  the  partners  as  between  themselves 
shall  be,  whether  the  business  shall  be  continued  after 
the  death  of  one  or  more  of  the  partners  and  how  it 
shall  be  wound  up.  But  the  important  thing  to  note 
is,  that  if  provision  be  not  made,  the  general  law,  and 
particularly  that  part  governing  the  powers  and 
duties  of  partners  to  each  other  and  to  third  persons, 
applies.  In  other  words,  the  partners  may,  by  their 
contract,  determine  what  their  rights  as  between 
themselves  shall  be;  but  if  they  do  not,  the  rules  of 


176  COMMERCIAL    LAW 

law  will  determine  them.  Thus  they  may  determine 
that  o£  two  partners  one  shall  have  two-thirds  and 
the  other  one- third  of  the  profits;  in  the  absence  of 
such  a  clause  the  law  determines  the  profits  shall  be 
divided  equally.  When  articles  have  been  once 
adopted  they  can  be  changed  only  by  the  consent  of 
all  the  partners;  this  consent  need  not  be  formally 
expressed  in  words,  but  it  may  be  implied  from  a  long- 
continued  course  of  conduct.  The  law  provides  no 
means  to  force  a  partner  to  live  up  to  his  contract 
except  in  a  very  few  cases ;  the  most  it  gives  is  a  right 
of  action  for  the  breach  caused  by  his  failure  to  do  as 
ai^reed. 

FIRM  NAME.— The  adoption  of  a  firm  name  is 
not  an  essential  to  a  partnership,  but  is  customary  and 
advisable.  The  names  of  the  partners  may  be  com- 
bined, or  a  single  name  used,  or  a  fictitious  name,  or 
any  name,  so  long  as  the  rights  of  other  persons  are 
not  violated.  In  some  States,  notably  New  York,  the 
use  of  the  name  of  a  person  not  a  partner  is  forbidden, 
as  is  also  the  use  of  the  expression  "&  Co.,"  unless  a 
partner  is  represented  by  it.  Ordinarily,  contracts 
may  be  made  in  the  firm  name  and  by  one  partner, 
but  contracts  under  seal  should  be  made  in  the  names 
of  the  partners  "doing  business  as,"  etc.,  and  cannot 
be  made  by  one  partner  without  authority  from  the 
others.  Conveyances  of  real  property  should  be  made 
to  or  by  the  individual  partners  "doing  business  as," 
etc.,  for  the  law  does  not  generally  recognize  the  firm 
as  a  separate  person  or  entity  sufficiently  to  enable  it 
as  such  to  take  or  give  a  conveyance.    If  the  deed 


COMMERCIAL   LAW  177 

ran  to  "John  Doe  &  Co.,"  the  title  would  be  in  John 
Doe  only,  though  he  would  be  said  to  hold  it  in  trust 
for  the  firm,  for  if  the  partnership  name  is  given  as 
the  grantee,  the  title  goes  only  to  those  whose  names 
appear,  and  if  the  partnership  were  doing  business 
under  a  fictitious  name,  the  deed  would  convey  to  no 
one.  Whether  land,  the  title  to  which  is  in  the  name 
of  one  partner,  is  held  in  trust  by  him  as  partnership 
property,  is  a  question  of  intention,  and  that  question 
is  determined  by  asking  with  what  money  was  the 
land  bought,  what  use  has  it  been  put  to,  has  it  been 
carried  on  the  books  of  the  firm,  with  what  money 
have  the  taxes,  insurance,  and  other  charges  been 
paid,  etc.  If  found  to  have  been  treated  as  partner- 
ship property,  the  fact  that  the  title  is  in  one  person 
counts  for  little,  as  he  will  be  said  to  hold  it  in  trust 
for  the  firm ;  but  the  careful  business  man  will  avoid 
trouble  by  having  the  property  conveyed  to  the  firm 
in  the  manner  indicated,  if  it  is  actually  partnership 
property. 

THE  POWERS  OF  A  PARTNER.— As  a  gen- 
eral agent,  a  partner  has  almost  unlimited  authority 
to  bind  the  firm.  Because  of  this,  we  have  here  one 
reason  for  not  recommending  the  partnership  form  of 
doing  business  unless  all  the  members  of  the  firm 
have  the  utmost  confidence  in  each  other.  These 
powers  of  the  partners  are  so  general  that  it  is  im- 
possible for  us  to  go  into  them  in  any  detail.  They 
are  summarized  in  the  most  compact  form  in  the 
Uniform  Partnership  Act.  Sections  9  to  17  of  that 
act  are  as  follows: 


178  COMMERCIAL    LAW 

9.  (1)  Every  partner  is  an  agent  of  the  partner- 
ship for  the  purpose  of  its  business,  and  the  act  of 
every  partner,  including  the  execution  in  the  partner- 
ship name  of  any  instrument,  for  apparently  carrying 
on  in  the  usual  way  the  business  of  the  partnership  of 
which  he  is  a  member,  binds  the  partnership,  unless 
the  partner  so  acting  has  in  fact  no  authority  to  act 
for  the  partnership  in  the  particular  matter,  and  the 
person  with  whom  he  is  dealing  has  knowledge  of  the 
fact  that  he  has  no  such  authority. 

(2)  An  act  of  a  partner,  which  is  not  apparently 
for  the  carrying  on  of  the  business  of  the  partnership 
in  the  usual  way,  does  not  bind  the  partnership  unless 
authorized  by  the  other  partners. 

(3)  Unless  authorized  by  the  other  partners  or 
unless  they  have  abandoned  the  business,  one  or 
more  but  less  than  all  the  partners  have  no  authority 
to: 

(a)  Assign  the  partnership  property  in  trust 
for  creditors  or  on  the  assignee's  promise  to  pay 
the  debts  of  the  partnership, 

(b)  Dispose  of  the  good-will  of  the  business, 

(c)  Do  any  other  act  which  would  make  it  im- 
possible to  carry  on  the  ordinary  business  of  the 
partnership, 

(d)  Confess  a  judgment, 

(e)  Submit  a  partnership  claim  or  liability  to 
arbitration  or  reference. 

(4)  No  act  of  a  partner  in  contravention  of  a  re- 
striction on  his  authority  shall  bind  the  partnership 
to  persons  having  knowledge  of  the  restriction. 


COMMERCIAL   LAW  179 

10.  (1)  Where  title  to  real  property  is  in  the 
partnership  name,  any  partner  may  convey  title  to 
such  property  by  a  conveyance  executed  in  the  part- 
nership name;  but  the  partnership  may  recover  such 
property  unless  the  partner's  act  binds  the  partner- 
ship under  the  provisions  of  paragraph  (1)  of  Sec- 
tion 9,  or  unless  such  property  has  been  conveyed  by 
the  grantee,  or  a  person  claiming  through  such 
grantee  to  a  holder  for  value  v^^ithout  knowledge  that 
the  partner,  in  making  the  conveyance,  has  exceeded 
his  authority. 

(2)  Where  title  to  real  property  is  in  the  name 
of  the  partnership,  a  conveyance  executed  by  a  part- 
ner, in  his  own  name,  passes  the  equitable  interest  of 
the  partnership,  provided  the  act  is  one  within  the 
authority  of  the  partner  under  the  provisions  of  para- 
graph (1)  of  Section  9. 

(3)  Where  title  to  real  property  is  in  the  name  of 
one  or  more  but  not  all  the  partners,  and  the  record 
does  not  disclose  the  right  of  the  partnership,  the 
partners  in  whose  name  the  title  stands  may  convey 
title  to  such  property,  but  the  partnership  may  re- 
cover such  property  if  the  partners*  act  does  not  bind 
the  partnership  under  the  provisions  of  paragraph  (1) 
of  Section  9,  unless  the  purchaser  or  his  assignee,  is 
a  holder  for  value,  without  knowledge. 

(4)  Where  the  title  to  real  property  is  in  the 
name  of  one  or  more  or  all  the  partners,  or  in  a  third 
person  in  trust  for  the  partnership,  a  conveyance  exe- 
cuted by  a  partner  in  the  partnership  name,  or  in  his 
own  name,  passes  the  equitable  interest  of  the  part- 


180  COMMERCIAL   LAW 

nership,  provided  the  act  is  one  within  the  authority 
of  the  partner  under  the  provisions  of  paragraph  (1) 
of  Section  9. 

(5)  Where  the  title  to  real  property  is  in  the 
names  of  all  the  partners,  a  conveyance  executed  by 
all  the  partners  passes  all  their  rights  in  such 
property. 

11.  An  admission  or  representation  made  by  any 
partner  concerning  partnership  affairs  within  the 
scope  of  his  authority  as  conferred  by  this  act  is  evi- 
dence against  the  partnership. 

12.  Notice  to  any  partner  of  any  matter  relating 
to  partnership  affairs,  and  the  knowledge  of  the  part- 
ner acting  in  the  particular  matter,  acquired  while  a 
partner  or  then  present  to  his  mind,  and  the  knowl- 
edge of  any  other  partner  who  reasonably  could  and 
should  have  communicated  it  to  the  acting  partner, 
operate  as  notice  to  or  knowledge  of  the  partnership, 
except  in  the  case  of  a  fraud  on  the  partnership  com- 
mitted by  or  with  the  consent  of  that  partner. 

13.  Where,  by  any  wrongful  act  or  omission  of 
any  partner  acting  in  the  ordinary  course  of  the  busi- 
ness of  the  partnership,  or  with  the  authority  of  his 
co-partners,  loss  or  injury  is  caused  to  any  person, 
not  being  a  partner  in  the  partnership,  or  any  penalty 
is  incurred,  the  partnership  is  liable  therefor  to  the 
same  extent  as  the  partner  so  acting  or  omitting  to 
act. 

14.  The  partnership  is  bound  to  make  good  the 
loss: 

(a)  Where    one    partner    acting    within    the 


COMMERCIAL    LAW  181 

scope  of  his  apparent  authority  receives  money  or 
property  of  a  third  person  and  misapplies  it;  and 
(b)  Where  the  partnership  in  the  course  of  its 
business  receives  money  or  property  of  a  third  per- 
son and  the  money  or  property  so  received  is  mis- 
appHed  by  any  partner  while  it  is  in  the  custody  of 
the  partnership. 

15.  All  partners  are  liable 

(a)  Jointly  and  severally  for  everything 
chargeable  to  the  partnership  under  Sections  13 
and  14. 

(b)  Jointly  for  all  other  debts  and  obligations 
of  the  partnership ;  but  any  partner  may  enter  into 
a  separate  obligation  to  perform  a  partnership  con- 
tract. 

16.  (1)  When  a  person,  by  words  spoken  or 
written  or  by  conduct,  represents  himself,  or  con- 
sents to  another  representing  him  to  any  one,  as  a 
partner  in  an  existing  partnership  or  with  one  or 
more  persons  not  actual  partners,  he  is  liable  to  any 
such  person  to  whom  such  representation  has  been 
made,  who  has,  on  the  faith  of  such  representation, 
given  credit  to  the  actual  or  apparent  partnership, 
and  if  he  has  made  such  representation  or  consented 
to  its  being  made  in  a  public  manner,  he  is  liable  to 
such  person,  whether  the  representation  has  or  has 
not  been  made  or  communicated  to  such  person  so 
giving  credit  by  or  with  the  knowledge  of  the  ap- 
parent partner  making  the  representation  or  consent- 
ing to  its  being  made. 

(a)  When  a  partnership  liability  results,  he  is 


182  COMMERCIAL   LAW 

liable  as  though  he  were  an  actual  member  of  the 

partnership. 

(b)  When  no  partnership  liability  results,  he 

is  liable  jointly  with  the  other  persons,  if  any,  so 

consenting  to  the  contract  or  representation  as  to 

incur  liability,  otherwise  separately. 

(2)  When  a  person  has  been  thus  represented  to 
be  a  partner  in  an  existing  partnership,  or  with  one 
or  more  persons  not  actual  partners,  he  is  an  agent 
of  the  persons  consenting  to  such  representation  to 
bind  them  to  the  same  extent  and  in  the  same  manner 
as  though  he  were  a  partner  in  fact,  with  respect  to 
persons  who  rely  upon  the  representation.  Where 
all  the  members  of  the  existing  partnership  consent 
to  the  representation,  a  partnership  act  or  obligation 
results;  but  in  all  other  cases  it  is  the  joint  act  or 
obligation  of  the  person  acting  and  the  person  con- 
senting to  the  representation. 

17.  A  person  admitted  as  a  partner  into  an  exist- 
ing partnership  is  liable  for  all  the  obligations  of  the 
partnership  arising  before  his  admission  as  though  he 
had  been  a  partner  when  such  obligations  were  in- 
curred, except  that  this  liability  shall  be  satisfied  only 
out  of  partnership  property. 

POWERS  OF  A  MAJORITY  OF  PARTNERS. 
— If  partners  disagree,  then  a  majority  of  them  have 
power  to  decide  what  shall  be  done;  but  there  are 
limits  even  to  the  power  of  a  majority.  They  can 
only  carry  on  the  business  of  the  firm,  and  any  vote 
of  the  majority,  or  action  of  the  majority,  to  change 
the  character  of  the  business  for  which  the  firm  was 


COMMERCIAL    LAW  183 

organized,  or  to  make  any  fundamental  change  in 
the  original  articles  of  the  partnership,  would  be 
invalid. 

RELATION  OF  PARTNERS  TO  ONE  AN- 
OTHER.— The  rules  determining  the  rights  and 
duties  of  partners  in  relation  to  the  partnership  are 
concisely  but  fully  set  forth  in  the  Act  as  fol- 
lows: 

18.  The  rights  and  duties  of  the  partners  in  rela- 
tion to  the  partnership  shall  be  determined,  subject  to 
any  agreement  between  them,  by  the  following  rules : 

(a)  Each  partner  shall  be  repaid  his  contribu- 
tions, whether  by  way  of  capital  or  advances  to  the 
partnership  property  and  share  equally  in  the  profits 
and  surplus  remaining  after  all  liabilities,  including 
those  to  partners,  are  satisfied;  and  must  contribute 
towards  the  losses,  whether  of  capital  or  otherwise, 
sustained  by  the  partnership  according  to  his  share 
in  the  profits. 

(b)  The  partnership  must  indemnify  every  part- 
ner in  respect  of  payment  made  and  personal  liabili- 
ties reasonably  incurred  by  him  in  the  ordinary  and 
proper  conduct  of  its  business,  or  for  the  preservation 
of  its  business  or  property. 

(c)  A  partner  who,  in  aid  of  the  partnership, 
makes  any  payment  or  advance  beyond  the  amount 
of  capital  which  he  agreed  to  contribute,  shall  be  paid 
interest  from  the  date  of  the  payment  or  advance. 

(d)  A  partner  shall  receive  interest  on  the  capi- 
tal contributed  by  him  only  from  the  date  when  repay- 
ment should  be  made. 


184  COMMERCIAL   LAW 

(e)  All  partners  have  equal  rights  in  the  man- 
agement and  conduct  of  the  partnership  business. 

(f)  No  partner  is  entitled  to  remuneration  for 
acting  in  the  partnership  business,  except  that  a  sur- 
viving partner  is  entitled  to  reasonable  compensation 
for  his  services  in  winding  up  the  partnership 
affairs. 

(g)  No  person  can  become  a  member  of  a  part- 
nership without  the  consent  of  all  the  partners. 

(h)  Any  difference  arising  as  to  ordinary  mat- 
ters connected  with  the  partnership  business  may  be 
decided  by  a  majority  of  the  partners;  but  no  act  in 
contravention  of  any  agreement  between  the  part- 
ners may  be  done  rightly  without  the  consent  of  all 
the  partners. 

19.  The  partnership  books  shall  be  kept,  subject 
to  any  agreement  between  the  partners,  at  the  prin- 
cipal place  of  business  of  the  partnership,  and  every 
partner  shall  at  all  times  have  access  to  and  may  in- 
spect and  copy  any  of  them. 

20.  Partners  shall  render  on  demand  true  and 
full  information  of  all  things  affecting  the  partner- 
ship to  any  partner  or  the  legal  representative  of  any 
deceased  partner  or  partner  under  legal  disability. 

21.  (1)  Every  partner  must  account  to  the  part- 
nership for  any  benefit,  and  hold  as  trustee  for  it  any 
profits  derived  by  him  without  the  consent  of  the 
other  partners  from  any  transaction  connected  with 
the  formation,  conduct,  or  liquidation  of  the  partner- 
ship or  from  any  use  by  him  of  its  property. 

(2)  This  section  applies  also  to  the  representa- 


COMMERCIAL   LAW  185 

tives  of  a  deceased  partner  engaged  in  the  liquidation 
of  the  affairs  of  the  partnership  as  the  personal  repre- 
sentatives of  the  last  surviving  partner. 

22.  Any  partner  shall  have  the  right  to  a  formal 
account  as  to  partnership  affairs: 

(a)  If  he  is  wrongfully  excluded  from  the  pait- 
nership  business  or  possession  of  its  property  by  his 
co-partners. 

(b)  If  the  right  exists  under  the  terms  of  any 
agreement. 

(c)  As  provided  by  Section  21. 

(d)  Whenever  other  circumstances  renders  it 
just  and  reasonable. 

TERMINATION  OF  THE  PARTNERSHIP. 
— A  partnership  is  terminated  either  by  act  of  the 
partners,  or  by  law.  Under  the  first  heading,  we  may 
mention  such  things  as  the  partnership  being  ter- 
minated by  the  accomplishment  of  the  object  for 
which  the  same  was  formed,  or  by  the  termination 
of'the  time  during  which  the  partnership  was  to  exist, 
or  by  mutual  consent  of  all  parties  concerned.  Under 
the  head  of  termination  by  operation  of  law,  we  have 
such  topics  as  the  death  of  a  partner,  the  insanity  of 
a  partner,  or  the  bankruptcy  of  a  partner,  and  a  disso- 
lution by  a  court,  as  for  example,  where  it  is  abso- 
lutely certain,  in  the  opinion  of  the  court,  that  the 
business  cannot  be  successfully  continued  longer.  In 
such  a  case,  although  some  of  the  partners  may  not 
wish  to  wind  up  the  affairs  of  the  business,  the  court 
may  order  it  done  in  the  interest  of  all  parties  con- 
cerned. 


186  COMMERCIAL    LAW 

OWNERSHIP  OF  FIRM  PROPERTY  AND 
CREDITORS'  RIGHTS.— The  firm  property  is 
owned  by  all  the  partners  jointly,  but  the  interest  of 
each  individual  partner  is  not  an  interest  in  each  piece 
of  firm  property,  but  a  right  to  have  an  accounting 
and  to  receive  on  the  accounting  such  share  of  the 
assets  as  belong  to  him  when  all  debts  due  from  him 
to  the  firm  and  all  liabilities  to  the  outside  world  are 
settled.  Consequently,  a  creditor  of  an  individual 
partner  cannot  seize  or  attach  or  levy  on  firm  prop- 
erty, because  that  firm  property  does  not  belong,  nor 
does  any  part  of  it  belong,  to  his  debtor.  The  creditor 
must  file  a  bill  in  equity  asking  that  the  partner's 
share  be  determined,  and  that  on  an  accounting  so 
much  as  is  found  due  to  the  debtor  partner  be  applied 
to  discharge  that  partner's  indebtedness. 

THE  DIVISION  OF  ASSETS.— Upon  final 
dissolution,  the  question  of  division  of  assets  comes 
up,  and  the  Uniform  Partnership  Act  gives  us  the 
general  rule  as  to  how  the  firm's  assets  are  divided. 
Section  40  of  the  Act  reads: 

In  settling  accounts  between  the  parties  after 
dissolution,  the  following  rules  shall  be  observed,  sub- 
ject to  any  agreement  to  the  contrary: 

(a)  The  assets  of  the  partnership  are: 

I.  The  partnership  property, 

II.  The  contributions  of  the  partners  neces- 
sary for  the  payment  o£  all  the  liabilities  specified 
in  clause  (b)  of  this  paragraph. 

(b)  The  liabilities  of  the  partnership  shall  rank 
in  order  of  payment,  as  follows : 


COMMERCIAL    LAW  187 

I.  Those  owing  to  creditors  other  than  part- 
ners, 

II.  Those  owing  to  partners  other  than  for 
capital  and  profits, 

III.  Those  owing  to  partners  in  respect  of 
capital, 

IV.  Those  owing  to  partners  in  respect  of 
profits. 

(c)  The  assets  shall  be  applied  in  the  order  of 
their  declaration  in  clause  (a)  of  this  paragraph  to 
the  satisfaction  of  the  liabilities. 

(d)  The  partners  shall  contribute,  as  provided 
by  Section  18  (a)  the  amount  necessary  to  satisfy  the 
liabilities;  but  if  any,  but  not  all,  of  the  partners  are 
insolvent,  or,  not  being  subject  to  process,  refuse  to 
contribute,  the  other  partners  shall  contribute  their 
share  of  the  liabilities,  and,  in  the  relative  proportions 
in  which  they  share  the  profits,  the  additional  amount 
necessary  to  pay  the  liabilities. 

(e)  An  assignee  for  the  benefit  of  creditors  or 
any  person  appointed  by  the  court  shall  have  the  right 
to  enforce  the  contributions  specified  in  clause  (d)  of 
this  paragraph. 

(f )  Any  partner  or  his  legal  representative  shall 
have  the  right  to  enforce  the  contributions  specified 
in  clause  (d)  of  this  paragraph,  to  the  extent  of  the 
amount  which  he  has  paid  in  excess  of  his  share  of 
the  liability. 

(g)  The  individual  property  of  a  deceased  part- 
ner shall  be  liable  for  the  contributions  specified  in 
clause  (d)  of  this  paragraph. 


188  COMMERCIAL   LAW 

(h)  When  partnership  property  and  the  indi- 
vidual properties  of  the  partners  are  in  the  possession 
of  a  court  for  distribution,  partnership  creditors  shall 
have  priority  on  partnership  property,  and  separate 
creditors  on  individual  property,  saving  the  rights  of 
lien  or  secured  creditors  as  heretofore. 

(i)  Where  a  partner  has  become  bankrupt  or  his 
estate  is  insolvent,  the  claims  against  his  separate 
property  shall  rank  in  the  following  order: 

I.  Those  owing  to  separate  creditors, 

II.  Those  owing  to  partnership  creditors, 

III.  Those  owing  to  partners  by  way  of  con- 
tribution. 

LIQUIDATION  OF  PARTNERSHIP.— When 
a  partnership  is  dissolved,  it  is  common  for  the  busi- 
ness to  require  liquidation,  and  frequently  one  or 
more  of  the  partners  are  what  are  called  liquidating 
partners.  If  a  partnership  is  dissolved  by  death,  for 
instance,  the  surviving  partners  have  a  right  to  be 
liquidating  partners  and  liquidate  the  business.  That 
means  they  may  carry  on  existing  contracts;  they 
may  dispose  of  the  stock  on  hand  to  the  best  advan- 
tage. If  this  requires  incidental  purchases  of  new 
goods,  they  may  be  made,  but  in  general,  new  busi- 
ness cannot  be  undertaken.  The  function  of  a  liqui- 
dating partner  is  to  satisfy  existing  contracts,  reduce 
the  property  of  the  firm  to  cash,  and  then  distribute 
it  to  those  who  are  entitled  to  receive  it. 

LIMITED  PARTNERSHIP.— Statutes,  as  we 
have  learned,  in  many  States  permit  the  formation 
of  limited  partnerships,  the  object  of  which  is  to 


COMMERCIAL    LAW  189 

enable  one  or  more  partners  to  avoid  unlimited  lia- 
bility for  debts.  Partners  in  a  general  partnership 
are  each  liable,  individually,  for  the  full  amount  of 
the  firm's  indebtedness.  If  one  partner  is  thus  com- 
pelled to  pay  more  than  his  share,  he  may  seek  redress 
by  demanding  contribution  from  his  fellow  partners, 
and  if  they  are  not  solvent,  he  will  not  be  able  to 
secure  reimbursement.  If  there  is  one  solvent  part- 
ner, for  instance,  and  two  other  partners,  both  of 
whom  become  insolvent,  the  result  will  be  that  the 
first  partner  will  have  to  pay  the  debts  of  the  firm 
and  will  have  no  redress  except  such  as  he  may  be 
able  to  get  from  the  insolvent  estates  of  his  two  part- 
ners. Now,  in  a  limited  partnership  a  limited  partner 
does  not  stand  to  lose  any  more  than  the  amount  of 
money  he  actually  puts  in  the  firm.  In  order  to  create 
a  limited  partnership  it  is  necessary  to  sign  a  cer- 
tificate prepared  for  the  purpose  and  stating  the  facts, 
file  it  in  the  office  of  the  Secretary  of  State  or  other 
official,  and  also  publish  it  so  that  the  public  may  be 
informed  of  the  circumstances  and  credit  may  not 
be  given  by  the  world  at  large  to  the  firm  on  the 
assumption  that  the  limited  partner  is  a  general  part- 
ner. He  puts  a  specified  amount  of  money  in  the  firm 
and  that  money  may  be  reached  by  creditors  of  the 
firm,  but  they  cannot  hold  him  further  liable.  A  good 
definition  of  a  limited  partnership  follows :  A  limited 
partnership  is  one  which  consists  of  one  or  more  per- 
sons called  general  partners  and  also  one  or  more 
persons  called  special  partners.  Every  general  part- 
ner is  an  agent  for  the  partnership  in  the  transaction 


190  COMMERCIAL   LAW 

of  its  business  and  has  authority  to  do  whatever  is 
necessary  to  carry  on  such  business  in  the  ordinary 
manner.  Every  general  partner  is  liable  to  third  per- 
sons, jointly  and  severally,  with  his  general  co-part- 
ners for  all  of  the  oblip:ations  of  the  partnership.  A 
special  partner  may  only  advise  as  to  the  manage- 
ment of  the  partnership  and  he  is  liable  for  the  obli- 
gations of  the  partnership  only  to  the  amount  of 
capital  invested  by  him  therein. 

SILENT  PARTNERS.— A  silent  partner  must 
not  be  confused  with  a  member  o£  a  limited  partner- 
ship. A  silent  partner  is  a  general  partner  who  takes 
no  part  in  the  active  management  of  the  business  and 
frequently  is  a  secret  partner.  A  member  of  a  limited 
partnership  can  never  be  a  secret  partner,  since  the 
terms  of  a  limited  partnership  must  be  published.  A 
member  of  a  limited  partnership  should  take  no  part 
in  the  management  of  the  business,  or  he  may  render 
himself  liable  as  a  general  partner.  The  limited  part- 
nership law  requires,  moreover,  that  he  must  have 
exactly  complied  with  the  law  by  making  out,  filing 
and  publishing  a  certificate.  The  statutes  of  the 
State  should  be  consulted  on  this  point  and  closely 
adhered  to. 

LIMITED. — We  often  see  also  in  print,  so  and 
so  "Ltd."  This  does  not  mean  a  limited  partnership. 
The  word  "limited"  is  used  in  the  name  of  an  English 
or  Canadian  company  organized  under  the  English 
or  Canadian  statutes,  but  such  companies  are  rather 
analogous  to  corporations  than  to  limited  partner- 
ships.   The  liability  in  such  companies  is  limited  alto- 


COMMSECIAL    LAW  191 

gether  to  the  assets  in  the  company's  hands.  There 
are  no  general  partners.  The  liability  of  all  stock- 
holders is  limited.  The  English  and  Canadian  law 
requires  that  the  word  Limited  be  added  to  the  name, 
so  that  the  public  may  not  be  deceived  into  believing 
that  the  company  is  a  partnership. 


CHAPTER  VI 


Corporations 

THE  NATURE  OF  A  CORPORATION.— The 
nature  of  a  corporation  is  perhaps  best  under- 
stood by  an  illustration.  In  the  case  of  Peo- 
ple's Pleasure  Park  Co.  v.  Rohleder,  109  Va.  439,  the 
facts  were  as  follows :  There  was  a  large  tract  of  land 
divided  up  into  a  number  of  lots,  and  in  each  deed, 
when  a  lot  was  sold,  there  was  a  covenant  providing 
that  title  to  the  real  property  should  never  vest  in  a 
person  of  African  descent,  or  in  a  colored  person. 
Later,  after  the  lots  had  been  sold,  several  of  them 
were  conveyed  to  a  corporation  composed  exclusively 
of  negroes.  The  corporation  knew,  when  it  pur- 
chased the  tract  of  land,  of  this  restriction  in  the  deed, 
and  the  land  was  bought  by  it  for  the  purpose  of 
establishing  an  amusement  park  for  colored  people. 
Suit  was  brought  in  a  court  of  equity  to  compel  the 
cancellation  of  the  deed  to  the  corporation.  Stated 
boldly,  the  decision  of  the  Virginia  court  amounts  to 
an  assertion  that  a  corporation  has  no  color.  In  other 
words,  the  corporation  is  an  entity  separate  and  dis- 
tinct from  its  members,  and  so,  although  all  the  stock- 
holders in  this  corporation  were  colored,  that  did  not 
make  the  corporation  a  colored  person.  Thus,  if  A, 
B,  and  C,  as  incorporators,  organize  the  X  Cor- 
poration, although  they  are  the  sole  stockholders, 
there  are  four  persons.  A,  B,  C,  and  the  X  Cor- 
poration. 

192 


COMMERCIAL   LAW  193 

THE  ENTITY  THEORY.— It  may  be  doubted 
if  any  court  would  carry  the  entity  theory  to  the  ex- 
tent that  it  would  allow  an  individual  who  was  the 
owner  of  a  piece  of  real  estate,  which  he  was  not  per- 
mitted by  the  deed  to  sell  to  negroes,  to  deliberately 
go  to  a  prospective  negro  purchaser  and  say:  "I  can- 
not sell  my  property  to  you  because  of  a  restriction 
in  the  deed,  but  I  will  pay  the  necessary  expenses,  if 
you,  with  two  of  your  friends,  will  form  a  corpora- 
tion to  take  title  to  this  property,  in  which  corpora- 
tion each  of  your  friends  will  own  one  share  and  you 
the  balance,  thus  retaining  control  yourself.  I  will 
then  deed  the  property  to  the  corporation  and  will 
thereby  get  around  the  covenant  in  my  deed  prevent- 
ing a,  transfer  to  negroes."  We  must  not  allow  the 
entity  theory  to  work  a  manifest  injustice,  as  was 
said  in  Erickson  v.  Revere  Elevator  Co.,  110  Minn. 
443 :  "Where  the  corporate  form  is  used  by  individuals 
for  the  purpose  of  evading  the  law,  or  for  the  perpe- 
tration of  fraud,  the  courts  will  not  permit  the  legal 
entity  to  be  interposed  so  as  to  defeat  justice." 

RESULTS  OF  THE  ENTITY  THEORY.— 
Flowing  from  the  entity  theory  is  the  result  that  the 
property  of  a  corporation  is  ovmed  by  the  corporation 
and  not  by  the  individual  members.  Therefore,  all 
conveyances  of  such  property,  whether  it  is  real  prop- 
erty or  personal  property,  must  be  made  by  the  cor- 
poration, and  cannot  be  made  by  the  members  or 
shareholders  as  individuals.  It  also  follows  that  all 
suits  against  or  by  the  corporation  must  be  brought 
against  the  corporation  or  by  the  corporation  as  an 


194  COMMERCIAL    LAW 

entity  and  not  against  the  individual  members.  Again, 
a  corporation  may  take  property  from  one  of  its  in- 
dividual members,  and  it  may  make  a  contract  with 
one  of  them,  and  it  may  sue  them  and  be  sued  by 
them. 

KINDS  OF  CORPORATIONS.— Corporations 
are  divided  into  public,  quasi-public,  and  private  cor- 
porations. The  private  corporation  is  such  as  is  cre- 
ated for  private  enterprises,  such  as  manufacturing, 
banking,  and  trading  corporations.  Religious  and 
eleemosynary  corporations  are  also  included  in  this 
classification.  The  public  corporation  is  such  as  is 
created  for  the  purposes  of  government,  such  as  cities, 
towns,  villages,  and  institutions  founded  by  the  State, 
and  managed  by  it  for  governmental  purposes.  Quasi- 
public  corporations  are  such  as  are  engaged  in  a  pri- 
vate business  which  is  affected  with  a  public  interest, 
such  as  railroads,  both  steam  and  electric,  gas  com- 
panies, water  companies,  lighting  companies,  and  the 
like.  The  public,  and  generally  the  quasi-public,  cor- 
porations possess  the  right  of  eminent  domain,  that 
is,  the  right  to  take  private  property  for  public  pur- 
poses upon  payment  of  just  compensation  to  the 
owner.  It  is  the  private  corporation  with  which  we 
are  usually  concerned  in  commercial  law,  and  this 
chapter  will  be  devoted  largely  to  a  discussion  of  that 
class. 

THE  CREATION  OF  A  CORPORATION.— A 
corporation  must  be  created  by  legislative  authority. 
Formerly,  a  corporation  was  created  by  special  act  of 
the  legislature,  but  in  recent  years  the  growth  in  the 


COMMERCIAL    LAW  195 

number  of  corporations,  and  also  the  political  wire- 
pulling necessary  to  get  an  incorporation  bill  through 
a  legislature,  have  resulted  in  the  almost  universal 
practice  of  having  the  legislature  pass  a  general  cor- 
poration act,  and  then  without  further  reference  to 
the  legislature,  any  group  of  persons,  of  the  requisite 
number,  may  become  incorporated  by  complying  with 
the  provisions  of  such  an  act.  The  formation  of  cor- 
porations under  the  laws  of  most  States  is  a  simple 
process,  requiring  in  general  the  preparation  of  an 
official  document  sometimes  termed  the  "certificate 
of  incorporation"  or  the  "charter,"  which  paper  sets 
forth  the  facts  which  are  required  under  the  laws  of 
the  State  wherein  the  corporation  is  to  be  formed. 
These  laws,  while  not  uniform,  generally  require  a 
statement  as  to  the  name  to  be  used  by  the  corpora- 
tion, the  names  of  the  proposed  directors  and  incor- 
porators, a  statement  of  the  general  purposes  or  ob- 
jects of  the  corporation,  the  location  of  its  principal 
office  and  place  of  business,  how  long  it  is  to  last,  the 
amount  of  its  authorized  capital,  the  par  value  of  its 
stock,  as  well  as  a  statement  in  regard  to  any  pre- 
ferred stock  which  may  be  contemplated.  Other  de- 
tails are  sometimes  required  under  the  various  State 
laws.  This  official  document  must  generally  be  signed 
or  executed  by  those  persons  who  are  the  incorpo- 
rators of  the  corporation.  As  a  rule,  three  or  more 
incorporators  are  required,  although  in  some  States 
five  is  the  minimum.  This  official  document,  after  it 
has  been  duly  executed,  is  usually  to  be  filed  in  the 
office  of  the  Secretary  of  State,  and  usually  also  in  that 


196  COMMERCIAL    LAW 

of  the  county  clerk  of  the  county  wherein  its  principal 
office  is  to  be.  This  procedure,  however,  is  subject  to 
some  variations  and  the  statutes  of  the  State  involved 
must  always  be  closely  followed.  As  soon  as  the  of- 
ficial document  has  been  properly  filed  and  the  other 
necessary  steps  taken  the  incorporators  hold  the  first 
meeting  and  effect  an  organization,  after  which  time 
the  corporation  is  generally  in  a  position  to  transact 
business,  although  in  some  States  it  is  provided  in 
effect  that  corporations  should  not  commence  busi- 
ness until  a  certain  share  of  the  capital  has  been  paid 
into  the  corporation  in  cash. 

CITIZENSHIP  OF  A  CORPORATION.— Al- 
though a  corporation  is  a  separate  entity,  entirely  dis- 
tinct and  apart  from  its  members,  such  separate  en- 
tity is  not  a  citizen  in  the  sense  in  which  we  use  the 
term  ordinarily.  At  a  general  election  a  corporation 
has  no  right  to  vote.  Again,  Article  4  Section  2,  of 
the  United  States  Constitution,  provides  that  "citizens 
of  each  State  shall  be  entitled  to  all  of  the  privileges 
and  immunities  of  citizens  in  the  several  States."  A 
corporation  is  not  a  citizen  in  this  sense.  Hence  a 
State  may  keep  all  insurance  companies,  incorporated 
outside  of  its  area,  from  doing  business  in  that  State 
by  discriminating  legislation  against  foreign  insur- 
ance corporations.  Insurance  is  not  looked  upon  as 
interstate  commerce,  about  which  the  individual 
States  may  not  legislate,  and  as  a  corporation  is  not  a 
citizen  within  the  meaning  of  Article  4,  Section  2, 
such  insurance  companies  have  no  redress.  In  one 
sense,  however,  a  corporation  is  looked  upon  as  a 


COMMERCIAL   LAW  197 

citizen.  Where  a  suit  is  between  citizens  of  different 
States,  and  the  amount  involved  is  over  the  prescribed 
sum,  either  party  may  bring  the  action  in  the  Federal 
courts,  if  he  so  desires,  instead  of  in  the  State  courts. 
In  this  sense,  a  corporation  is  to  be  regarded  as  if  it 
were  a  citizen  of  the  State  in  which  it  is  created. 
If  I  live  in  New  York  and  the  American  Tobacco  Co. 
is  incorporated  in  New  Jersey,  suit  between  us  may 
be  brought  in  the  Federal  courts  on  the  ground  of  di- 
versity of  citizenship  on  the  part  of  plaintiff  and  de- 
fendant. 

POWERS  OF  CORPORATIONS.— A  corpora- 
tion is  unable  to  do  anything  beyond  such  powers  as 
are  granted  it  by  law.  As  to  the  extent  of  the  powers 
possessed  by  a  corporation,  we  may  conveniently  di- 
vide corporate  powers  into  those  which  are  express 
and  those  which  are  implied.  Express  powers  may  be 
considered  as  including  those  which  are  mentioned  in 
the  official  documents  used  or  granted  upon  the  be- 
ginning of  the  existence  of  the  corporation.  These 
official  documents  are  spoken  of  as  "charters"  or  "cer- 
tificates of  incorporation."  Whatever  term  may  be 
applied  to  them  there  is  generally  in  such  documents 
a  statement  of  the  general  purposes  or  objects  for 
which  the  corporation  is  formed ;  in  other  words,  of  the 
general  business  in  which  it  is  to  engage.  There  is 
also  a  statement  of  the  general  powers  of  the  corpora- 
tion which  is  to  engage  in  the  business  mentioned. 
The  powers  so  mentioned  in  such  official  documents 
may  be  termed,  as  we  have  stated,  express  powers 
of  the  corporation.    Needless  to  say,  however,  it  is 


198  COMMERCIAL    LAW 

not  usual  or  possible  to  attempt  to  indicate  in  any 
such  official  documents  all  the  details  of  the  opera- 
tions of  business.  Therefore,  it  is  necessary  to  imply 
that  in  addition  to  such  express  powers  the  corpora- 
tion has  power  to  do  such  acts  as  may  be  reasonably 
necessary  or  incidental  to  the  carrying  on  of  the  busi- 
ness mentioned.  Powers  so  implied,  without  words, 
are  termed  "implied  powers."  Therefore,  the  total 
powers  of  a  corporation  consist  of  the  express  powers, 
namely,  such  as  are  named  in  the  official  documents 
containing  a  statement  of  its  purposes  and  the  busi- 
ness in  which  it  is  to  engage,  and  the  powers  which 
would  be  reasonably  implied  under  the  rule  just  men- 
tioned, as  necessary  and  incidental  to  the  carrying 
out  of  the  express  powers.  Such  implied  powers  do 
not  give  the  corporation  any  power  to  do  acts  which 
are  not  reasonably  necessary  and  incidental  in  its  reg- 
ular business.  To  allow  validity  to  acts  not  so  rea- 
sonably necessary  and  incidental  would  be  in  reality 
allowing  the  corporation  to  engage  in  outside  busi- 
ness, which,  under  its  charter,  it  has  no  power  to  en- 
gage in.  As  an  illustration  of  this  let  us  assume 
that  the  X  company  was  incorporated  to  build,  run 
and  operate  a  railroad  between  two  towns  named  A 
and  B.  The  official  charter  of  the  corporation  may 
state  further  details  of  the  corporation's  powers  or  it 
may  not.  But,  if  such  details  are  not  stated,  the  cor- 
poration would,  obviously,  have  as  express  powers, 
the  power  to  build  the  road  and  to  operate  it  between 
the  towns  mentioned.  It  would  also  have  as  implied 
powers  the  power  to  do  any  act  reasonably  necessary 


COMMERCIAL    LAW  199 

or  incidental  to  the  operation  of  a  railroad,  such  for 
example  as  the  purchase  of  rails,  ties  or  other  railroad 
supplies,  the  hiring  of  employees,  erection  of  stations 
and  the  power  also  to  give  negotiable  paper  in  pay- 
ment for  such  supplies  or  the  raising  of  money  by 
mortgaging  its  property  or  otherwise  where  necessary 
to  carry  on  its  business.  In  other  words,  the  corpora- 
tion may  be  said  to  have  as  implied  powers  all  the 
powers  which  an  individual  would  reasonably  and 
usually  exercise  if  he  were  operating  the  railroad. 
However,  the  corporation  would  have  no  power,  ex- 
press or  implied,  to  do  any  act  not  reasonably  neces- 
sary to  the  railroad  business,  such,  for  example,  as 
the  purchase  of  a  stock  farm  or  the  operation  of  a 
steamer  line  or  a  grocery  store,  or  the  leasing  of  its 
line.  If  the  corporation,  then,  should  make  any  con- 
tract with  relation  to  engaging  in  these  outside  mat- 
ters— the  corporation  having  no  power  to  engage  in 
them — a  valid  contract  could  not  arise  and  therefore 
the  corporation  could  not  be  held  liable  thereon. 

ULTRA  VIRES  ACTS.— Where  a  corporation 
attempts  to  do  an  act  which  is  clearly  beyond  its  ex- 
press or  implied  powers,  such  act  is  generally  termed 
an  "ultra  vires"  act,  and  it  may  frequently  consist  in 
an  attempted  contract  by  a  corporation.  Hence  we 
must  consider  with  some  care  contracts  of  corpora- 
tions which  may  be  termed  ultra  vires.  As  the  cor- 
poration lacks  power  it  is  generally  said  that  the  con- 
tract does  not  arise  and  hence  neither  the  corpora- 
tion nor  the  person  with  whom  it  attempted  to  con- 
tract would  theoretically  be  bound  thereon.    Yet,  in 


200  COMMERCIAL   LAW 

many  States,  a  special  rule  has  been  adopted  whereby 
a  corporation  may  be  held  upon  such  contract  in  cer- 
tain cases  even  though  it  had  no  power  to  make  it. 
This  may  be  termed  the  "doctrine  of  estoppel,"  and 
generally  includes  cases  where  the  corporation  has 
assumed  to  make  a  contract  which  was  ultra  vires  or 
beyond  its  powers  but  which  would  appear  to  an  out- 
sider as  incidental  to  the  corporate  business  and  there- 
fore as  within  its  corporate  powers.  In  such  circum- 
stances, if  the  outsider  with  whom  the  corporation 
assumed  to  make  the  contract  does  in  fact  rely  rea- 
sonably upon  the  corporate  power  to  make  it,  having 
been  deceived  by  appearances  and  having  no  warning 
that  the  corporation  actually  lacked  power,  and  hav- 
ing paid  over  money  or  delivered  goods  or  performed 
services  or  parted  with  other  value  under  the  contract, 
he  may  generally  enforce  the  contract  against  the 
corporation.  In  other  words,  under  such  circum- 
stances, the  corporation  is  estopped  or  forbidden  to 
evade  its  obligation  by  asserting  the  point  that  it  had 
no  power  to  make  such  contract.  However,  this  is 
strictly  limited  to  cases  where  the  corporation  ap- 
peared to  have  the  power  to  make  the  contract  and 
where  the  person  dealing  with  it  had  no  reason  to 
suspect  or  doubt  its  power  in  that  regard,  and  where 
the  person  dealing  with  the  corporation  had  parted 
with  some  value  of  the  kind  mentioned,  in  his  reli- 
ance that  the  contract  was  within  the  corporate  pow- 
ers of  and  therefore  binding  upon  the  corporation. 
Thus,  where  such  person  has  done  nothing  toward 
carrying  out  his  duty  under  the  contract  he  would 


COMMERCIAL    LAW  201 

have  no  claim  or  right  to  enforce  the  same  as  a  bind- 
ing obligation  of  the  corporation.  Many  courts  also 
treat  him  somewhat  differently  and  take  the  attitude 
that  an  outsider  who  has  dealt  with  the  corporation 
is  entitled  not  to  enforce  the  attempted  contract,  but 
is  entitled  only  to  recover  from  the  corporation  the 
reasonable  value  of  such  goods  or  service  as  it  has 
voluntarily  accepted  from  him. 

DE  FACTO  AND  DE  JURE  CORPORA- 
TIONS.— It  sometimes  happens  that  a  group  of  per- 
sons may  attempt  to  organize  a  corporation  and  fail 
to  comply  with  all  the  provisions  of  the  law  in  the 
State  in  which  they  attempt  to  organize.  The  ques- 
tion arises  then:  What  have  we?  Of  course,  we  do 
not  have  a  full  completed  organization,  which  we 
would  call  a  corporation  de  jure  (by  right  of  law). 
We  may  have  what  is  called  a  corporation  de  facto  (in 
fact).  In  order  to  constitute  a  corporation  de  facto,  it 
is  generally  held  that  the  following  requisites  must  ex- 
ist: There  must  be  a  valid  law  which  authorizes  the 
Formation  of  such  a  corporation ;  a  colorable  attempt  to 
organize  under  the  provision  of  such  law;  and  an  as- 
sumption of  corporate  power,  or,  as  is  sometimes 
called,  a  user.  If  these  facts  exist,  we  then  have  a  cor- 
poration de  facto,  and  persons  dealing  with  such  a 
corporation  are  usually  held  to  the  same  responsibili- 
ties as  though  it  was  an  actual  de  jure  corporation. 
The  State,  ordinarily,  is  the  only  person  which  can 
question  the  existence  of  such  a  body,  and  this  is  usu- 
ally done  in  a  suit  by  the  attorney-general.  If  the 
parties  have  not  even  complied  with  the  requisites  of 


202  COMMERCIAL   LAW 

a  de  facto  corporation,  the  authorities  are  divided  as 
to  what  kind  of  an  organization  it  is,  although,  per- 
haps, the  best  decisions  would  hold  the  parties  liable 
as  partners.  They  must  have  contemplated  some 
kind  of  liability  and  failing  to  create  even  a  corpora- 
tion de  facto,  a  partnership  liability  is  all  that  is  left, 
except  individual  liability,  and  that  is  apparently  just 
what  they  did  not  intend. 

PROMOTERS. — A  promoter  is  a  very  common 
person  in  the  modern  industrial  world.  He  is  a  person 
who  brings  about  the  organization  of  corporations, 
gets  the  people  together  who  are  interested  in  the  en- 
terprise, aids  in  procuring  subscriptions,  and  takes 
general  charge  of  all  the  matters  incident  to  the  for- 
mation of  the  corporation.  In  other  ways,  he  is  gov- 
erned by  the  rules  of  agency  and  his  position  is  that 
of  a  fiduciary.  The  majority  of  the  courts  hold  that 
there  is  no  liability  on  the  part  of  the  corporation  to 
pay  for  his  expenses  and  his  services,  in  promoting 
the  organization,  unless  the  corporation  as  an  organi- 
zation expressly  promises  to  pay  or  otherwise  clearly 
recognizes  the  obligation.  Because  of  the  fiduciary  re- 
lationship, which  a  promoter  occupies,  he  is  not  per- 
mitted to  make  any  secret  profits  at  the  expense  of  the 
corporation.  If  he  secures  property  for  $1,000,000,  he 
may  not  turn  it  over  to  the  corporation  for  $1,500,000 
and  pocket  the  profit  himself.  A  corporation  cannot 
be  liable  for  the  acts  of  a  promoter  before  the  corpora- 
tion came  into  existence.  It  may,  however,  after  com* 
ing  into  existence  adopt  the  acts  of  the  promoter  and 
thereby  render  itself  liable.    If,  knowing  the  terms  of 


COMMERCIAL    LAW  203 

an  agreement  made  by  a  promoter,  the  corporation 
takes  advantage  of  the  agreement  or  recognizes  it, 
it  thereby  in  effect  itself  becomes  a  party  to  the  agree- 
ment. Unless  the  terms  of  a  promoter's  agreement 
expressly  state  the  contrary,  the  promoter  is  person- 
ally liable  upon  it  as  a  contractor. 

POWER  OF  THE  STATE  OVER  A  CORPO- 
RATION.— It  must  follow,  that  if  a  State  creates  a 
corporation,  then  it  should  have  certain  control  over 
it.    The  United  States  Supreme  Court  has  recognized 
the  right  of  visitation  as  residing  in  the  State.    Visita- 
tion is,  in  law,  the  act  of  a  superior  or  superintendent 
officer  who  visits  a  corporation  to  examine  into  its 
manner  of  conducting  business  and  its  observance  of 
the  laws.     The  visitation  of  National  banks  by  the 
Comptroller  of  the  Currency  is  a  common  example  of 
the  exercise  of  this  authority.    One  of  the  most  fam- 
ous cases  in  the  United  States  Supreme  Court  is  the 
Dartmouth  College  case.    In  1769,  the  King  of  Eng- 
land granted  a  charter  to  twelve  people  under  the 
name  of  "The  Trustees  of  Dartmouth  College."  They 
were  authorized  to  conduct  a  college  and  they  founded 
Dartmouth  College  in  Hanover,  New  Hampshire.    In 
1816,  the  legislature  in  the  State  of  New  Hampshire 
undertook  to  amend  the  charter  in  many  ways,  among 
other  things,  increasing  the  number  of  trustees  to 
twenty-one.     A  furious  conflict  ensued  between  the 
State  and  the  trustees.    The  State  finally  brought  suit 
to  recover  the  corporate  seal  and  records  which  were 
held  by  a  Mr.  Woodward,  who  held  them  under  the 
amendatory  act  to  which  we  have  referred.    The  case 


204  COMMERCIAL   LAW 

is  known  as  Dartmouth  College  v.  Woodward,  4 
Wheaton  518.  The  Dartmouth  College  trustees  were 
represented  by  Daniel  Webster,  and  this  is  one  of  his 
famous  cases  before  the  Supreme  Court.  He  took  the 
position  that  the  charter  granted  by  the  King  of  Eng- 
land and  afterwards  recognized  by  the  State  of  New 
Hampshire,  was  a  contract  between  the  State  and  the 
trustees.  This  being  so,  it  was  protected  by  the  pro- 
vision in  the  United  States  Constitution  which  pro- 
vides that  no  State  shall  pass  any  law  impairing  the 
obligation  of  contracts.  The  United  States  Supreme 
Court  upheld  this  position.  The  act  of  the  legislature 
of  New  Hampshire  was  held  invalid.  We  then  found 
ourselves  in  the  position  of  having  States  creating 
corporations  and  then  not  being  able  to  control  them. 
Whatever  may  be  said  in  regard  to  the  law  as  laid 
down  by  the  United  States  Supreme  Court,  this  situa- 
tion was  unfortunate.  Shortly  thereafter  in  the  vari- 
ous State  legislatures,  a  method  to  meet  the  situation 
was  devised,  and  this  is  what  was  done:  When  a 
general  corporation  law  is  passed,  the  State  inserts 
in  it  a  clause  to  this  effect:  "The  State  hereby  re- 
serves the  right  to  alter,  amend,  or  repeal  the  charter 
of  any  corporation  organized  under  this  act."  This, 
then,  makes  this  clause  a  part  of  the  contract  when  a 
new  corporation  is  organized.  It  knows  that  it  is 
subject  to  having  its  charter  amended  or  repealed 
without  its  consent.  The  effects,  therefore,  of  the 
Dartmouth  College  decision  have  been  practically 
nullified  by  such  clauses  inserted  in  the  various  incor- 
poration laws.    Such  incorporation  acts  do  not  relate 


COMMERCIAL    LAW  205 

to  corporations  organized  before  such  act  was  passed. 
Under  this  method  of  procedure,  the  legislature  to- 
day surely  has  an  efficacious  method  of  controlling  the 
corporations  which  it  creates. 

LIABILITY  FOR  TORTS  AND  CRIMES.— -A 
corporation  is  ordinarily  liable,  the  same  as  an  indi- 
vidual, for  all  torts  committed  by  its  agents  in  the 
scope  of  their  authority.  A  corporation  may  even  be 
liable  for  acts  which  are  beyond  its  authority.  For  ex- 
ample, in  the  case  of  Hannon  v.  Siegel-Cooper  Co.,  167 
N.  Y.  244,  it  was  held  that  the  department  store  of  the 
Siegel-Cooper  Company,  a  corporation,  was  liable  for 
mal-practice  in  dentistry.  The  charter  of  the  company 
did  not  give  the  company  the  right  to  practice  den- 
tistry, but  space  in  the  store  was  rented  to  a  dentist 
who  conducted  a  dental  parlor.  Because  of  his  negli- 
gent treatment  of  a  patient,  the  court  held  that  the 
corporation  was  liable  for  the  negligent  acts  of  its 
agent.  Corporations  may  also  be  held  liable  for  such 
torts  as  involve  a  mental  element,  like  fraud  and  libel. 
A  corporation  may  be  criminally  responsible  for  fail- 
ure to  perform  a  duty  imposed  upon  it  by  law,  and  in 
many  States  there  are  statutes  which  make  it  a  crimi- 
nal offense  for  a  corporation  to  do  or  fail  to  do  certain 
acts.  It  is  generally  held,  however,  that  a  corporation 
cannot  commit  a  crime  which  involves  a  mental  op- 
eration, as  for  example,  murder.  Murder  involves  a 
mental  operation;  it  is  "killing  with  malice  afore- 
thought." Then  again,  it  would  be  difficult  to  punish 
a  corporation  for  the  crime  of  murder,  because  under 
our  State  constitutions,  the  punishment  for  murder 


206  COMMERCIAL    LAW 

is  either  death  or  life  imprisonment.  Although  a  cor- 
poration is  a  separate  person,  there  is  no  way  to  kill 
it  or  imprison  it  for  life.  You  surely  would  not  do  so 
by  inflicting  this  penalty  on  all  the  stockholders.  It  is 
generally  provided,  then,  by  statute  that  such  crimes 
that  a  corporation  can  commit  are  to  be  punished 
either  by  a  fine  or  by  imprisonment  of  the  directors. 

SHERMAN  ANTI-TRUST  ACT.— On  July  2, 
1890,  the  Sherman  Anti-Trust  Act  was  passed  by  Con- 
gress. The  first  section  of  this  act  reads :  "Every  con- 
tract, combination  in  the  form  of  trust  or  otherwise,  or 
conspiracy,  in  restraint  of  trade  or  commerce  among 
the  several  States,  or  with  foreign  nations,  is  hereby 
declared  to  be  illegal.  Every  person  who  shall  make 
any  such  contract,  or  engage  in  any  such  combination 
or  conspiracy,  shall  be  deemed  guilty  of  a  misde- 
meanor, and,  on  conviction  thereof,  shall  be  punished 
by  a  fine  not  exceeding  $5,000,  or  by  imprisonment  not 
exceeding  one  year,  or  by  both  said  punishments, 
in  the  discretion  of  the  court."  The  second  section  of 
this  act  reads :  ''Every  person  who  shall  monopolize, 
or  attempt  to  monopolize,  or  combine  or  conspire  with 
any  other  person  or  persons  to  monopolize  any  part 
of  the  trade  or  commerce  among  the  several  states, 
or  with  foreign  nations,  shall  be  deemed  guilty  of  a 
misdemeanor,  and  on  conviction  thereof  shall  be  pun- 
ished by  a  fine  not  exceeding  $5,000,  or  by  imprison- 
ment not  exceeding  one  year,  or  by  both  said  punish- 
ments, in  the  discretion  of  the  court." 

It  would  be  impossible,  in  a  small  amount  of 
space,  to  call  attention,  except  in  sL  general  way,  to 


COMMERCIAL    LAW  207 

the  importance  of  this  act  and  the  difficulty  of  under- 
standing it,  without  carefully  reading  the  various  con- 
flicting decisions  of  the  United  States  Supreme  Court 
handed  down  since  the  passage  of  the  act.  The  act, 
being  a  Federal  act,  relates  only  to  interstate  com- 
merce. That  kind  of  business,  conducted  by  corpora- 
tions, which  is  intrastate,  if  controlled  at  all  by  similar 
legislation,  would  be  by  virtue  of  a  State  act.  Per- 
haps the  most  famous  of  the  Sherman  Anti-Trust  Act 
cases  decided  by  the  United  States  Supreme  Court  is 
that  of  the  United  States  v.  Standard  Oil  Co.,  221  U. 
S.  1,  where  the  majority  opinion  was  written  by  the 
late  Chief  Justice  White,  and  in  which  he  enunciated 
the  so-called  "rule  of  reason"  which  brings  the  inter- 
pretation of  that  act  very  much  in  harmony  with  the 
rules  of  the  common  law  in  regard  to  illegal  contracts 
and  monopolies. 

BY-LAWS. — A  by-law  is  a  permanent  rule  for 
the  government  of  a  corporation  and  its  officers.  The 
purpose  of  a  by-law  is  to  regulate  and  define  the  duties 
of  the  members  of  the  corporation  toward  the  cor- 
poration and  between  themselves.  The  power  to 
make  the  by-laws  is  vested  in  the  stockholders.  There 
are  certain  qualifications  which  all  by-laws  must  pos- 
sess. They  must  be  reasonable  and  not  inconsistent 
with  law  or  any  rule  of  public  policy.  It  would  not 
be  possible  for  a  majority  of  the  stockholders  at  a 
regular  stockholders'  meeting  to  pass  by-laws  which 
would  deliberately  deprive  the  minority  stockholders 
of  rights  which  belong  to  them.  The  by-laws  are,  of 
course,  always  subject  to  the  provisions  of  the  charter 


208  COMMERCIAL    LAW 

of  the  corporation,  and  if  a  corporation  is  authorized 
to  operate  a  railroad,  it  could  not,  by  passing  a  by-law, 
to  the  effect  that  it  was  deemed  wise  to  enter  into  the 
steel  manufacturing  business,  change  the  nature  of 
the  corporation  in  that  manner. 

STOCKHOLDERS'  MEETING.— In  order  that 
the  acts  of  the  majority  of  stockholders  shall  be  valid, 
they  must  be  authorized  at  a  regular  stockholders* 
meeting.  This  must  be  held  in  the  principal  office  of 
the  company,  and  the  notice  required  by  the  by-laws 
must  be  given  to  all  of  the  stockholders.  After  this 
is  done,  the  majority  of  the  stockholders  may  trans- 
act business  and  bind  the  corporation.  Of  course,  in 
a  large  corporation  with  a  hundred  thousand  share- 
holders, as  is  the  case  with  some  of  our  bigger  corpo- 
rations like  the  United  States  Steel  Corporation  and 
the  Pennsylvania  Railroad,  very  few  of  the  stockhold- 
ers actually  attend  the  meetings.  The  directors  usually 
send  out  with  the  notice  of  the  meeting,  a  proxy,  and 
the  stockholders  who  are  not  able  to  be  present  send 
in  their  proxy  authorizing  certain  persons  to  vote  for 
them.  In  this  way,  a  majority  of  the  stockholders  are 
present  at  the  meeting,  either  in  person  or  by  proxy. 
In  certain  cases  stockholders  may  interfere  with  the 
action  of  directors  in  connection  with  the  general  man- 
agement of  a  corporation,  or  may  even  oust  the  di- 
rectors from  their  positions.  These  cases  are  ex- 
tremely rare,  since  the  power  of  directors  is  supreme 
as  to  all  corporate  matters  as  to  which  the  statutes  or 
by-laws  do  not  provide  for  concurrence  or  other  action 
by  the  stockholders.    Where  proof  is  offered,  how- 


COMMERCIAL   LAW  209 

ever,  of  fraud,  violation  of  law  or  gross  negligence 
of  the  directors  whereby  loss  has  been  caused  or  is 
threatened,  stockholders  may  in  some  cases  obtain  the 
ousting  of  directors.  This  sometimes  results  in  plac- 
ing a  receiver  in  temporary  charge  of  the  corporation 
or  in  the  holding  of  a  special  election  of  new  directors. 
No  complaint,  however,  will  generally  be  entertained 
against  directors  merely  because  their  judgment  does 
not  agree  with  that  of  the  stockholders  even  if  some 
action  of  the  directors  may  not  have  resulted  favor- 
ably to  the  corporation,  provided  such  action  was 
taken  honestly  and  with  all  due  care  and  regard  to 
law.  As  an  illustration,  the  directors  of  the  X  Com- 
pany made  a  certain  contract  on  behalf  of  the  cor- 
poration whereby  it  was  agreed  with  Y  that  property 
of  the  corporation  should  be  transferred  to  the  latter 
for  much  less  than  its  evident  actual  value.  This 
operation  would  usually  indicate  fraud  on  the  part  of 
the  directors,  or  at  least  such  gross  negligence  as 
would  in  many  cases  justify  stockholders  in  asking  a 
legal  inquiry  into  the  action  of  the  directors,  which 
would  result,  if  sufficient  facts  were  proved,  in  their 
removal  and  an  injunction  against  the  performance 
of  the  contract.  However,  if  the  value  of  the  prop- 
erty were  doubtful  and  the  directors  had  used  all  due 
care  and  effort  to  ascertain  its  true  value  and  to  obtain 
the  best  available  price,  no  complaint  could  usually 
be  made  although  it  should  later  develop  that  a  better 
price  might  have  been  obtained. 

FOREIGN  CORPORATIONS.— A  foreign  cor- 
poration is  one  which  is  organized  under  the  laws  of 


210  COMMERCIAL    LAW 

some  foreign  country  or  some  other  State.  Foreign 
corporations  are  not  necessarily  confined  to  doing 
business  in  their  own  State ;  they  may  enter  other 
States.  As  for  example,  a  company  organized  in  New 
Jersey  may  enter  the  State  of  New  York  and  do  busi- 
ness. If,  however,  the  New  Jersey  corporation  comes 
to  New  York  and  makes  a  regular  practice  of  doing 
business,  it  must  comply  with  the  provisions  of  the 
corporation  law  of  New  York,  and  secure  a  license  to 
do  business  in  New  York.  It  is  not  uncommon  to  en- 
force this  provision  in  an  indirect  method  by  provid- 
ing that  if  a  foreign  corporation  does  not  take  out 
this  license,  it  shall  not  be  allov/ed  to  sue  in  the  courts 
of  the  State  where  it  is  doing  business. 

MANAGEMENT  OF  CORPORATIONS.— 
The  management  of  any  corporation  rests  directly 
with  the  board  of  directors  and  they  may  be  consid- 
ered as  the  agents  of  the  corporation  to  direct  its  busi- 
ness affairs.  The  directors,  however,  are  subject  in 
their  action  to  any  limitation  upon  their  power  which 
may  have  been  included  in  the  charter  or  certificate 
of  incorporation  or  which  may  have  been  adopted  in 
the  by-laws.  The  directors  are  also  subject  to  any 
provisions  in  the  statutes  of  the  State,  which  fre- 
quently provide  that  they  shall  not  take  certain  im- 
portant actions,  such  as  the  mortgaging  of  corporate 
property,  etc.,  without  special  procedure  involving  a 
meeting  and  vote  of  the  stockholders.  Where,  how- 
ever, the  directors'  authority  is  not  limited  by  the 
statutes  or  the  charter  or  by-laws,  they  may  be  con- 
sidered as  having  full  power  to  manage  the  affairs 


COMMERCIAL    LAW  211 

of  the  corporation.  In  connection  with  that  power 
they  may  elect  a  president  and  other  corporate  officers 
and  may  appoint  any  other  agents  or  employees  at 
their  discretion.  They  may  also  define  the  powers  to 
be  exercised  by  the  president  and,  the  other  officers 
and  employees.  This  would  give  them  power  to  limit 
the  authority  of  the  president  or  any  other  officer. 
Hov/ever,  where  a  person  deals  with  the  president  or 
any  other  officer  of  a  corporation  in  behalf  of  the  cor- 
poration, he  may  usually  rely  reasonably  upon  the 
president  or  other  officer  having  similar  power  to  that 
generally  possessed  by  such  an  officer,  and  in  many 
cases  the  corporation  would  be  held  bound  by  the  acts 
of  such  officer  even  though  he  actually  violated  some 
limits  placed  upon  him  by  the  directors.  This  may 
be  illustrated  by  assuming  that  the  X  Company  was 
in  the  business  of  manufacturing  furniture,  and  A, 
the  president  thereof,  had  made  a  contract  with  B, 
an  outsider,  for  the  purchase  from  the  latter  of  cer- 
tain wood  to  be  used  in  the  corporate  business.  As  a 
matter  of  fact,  however.  A,  the  president,  had  no 
power  to  make  such  contract,  since  the  directors  had 
passed  a  resolution  forbidding  him  to  purchase  any 
raw  materials  without  first  having  the  proposed  pur- 
chase approved  by  the  board  of  directors.  Therefore, 
A,  as  a  matter  of  fact,  would  have  no  power  to  make 
the  contract  with  B,  on  behalf  of  the  corporation.  Yet, 
B  had  not  in  any  way  been  warned  of  this  limitation 
upon  A's  power,  and  as  the  purchase  of  materials 
would  be  a  usual  one;  for  the  president  or  executive 
head  of  such  a  corporation  to  make,  B  might  reason- 


212  COMMERCIAL   LAW 

ably  assume  that  A  had  power  to  make  the  contract. 
Therefore,  B  would  be  able  to  hold  the  corporation 
to  the  contract  under  the  principle  of  apparent  au- 
thority, considered  in  connection  with  the  law  of 
agency.  Naturally,  in  turn,  the  directors  would  have 
a  claim  against  the  president  for  any  loss  sustained, 
as  he  had  not  only  violated  his  duty  but  had  also  dis- 
obeyed and  disregarded  explicit  instructions.  The 
by-laws  of  a  corporation  are  generally  adopted  by  the 
stockholders  and  provide  for  all  matters  relating  to 
the  corporate  management  which  are  not  provided 
for  in  the  charter  or  certificate  of  incorporation.  Such 
by-laws  are  binding  upon  all  persons  who  know  of 
them,  or  reasonably  should  know  of  them,  provided 
they  are  not  in  violation  of  law  and  are  reasonable. 
It  is  the  general  rule  that  meetings  called  to  adopt 
new  by-laws  or  to  alter  previous  by-laws  should  be 
announced  in  some  special  way  so  that  all  interested 
parties  may  receive  due  notice  and  thus  have  an  op- 
portunity to  arrange  to  be  present  and  vote  on  the 
matters  to  be  taken  up  at  such  meeting. 

ELECTION  OF  DIRECTORS.— The  directors 
of  a  corporation  are  elected  by  the  stockholders  and 
the  election  generally  takes  place  at  the  regular  an- 
nual meeting  of  stockholders  of  the  corporation. 
Either  the  entire  board  of  directors  is  elected  at  that 
time  for  the  ensuing  year,  or  a  portion  of  them.  In 
this  connection  it  is  provided  by  the  statutes  of  many 
States  that  at  least  a  certain  proportion  of  the  total 
number  of  directors  shall  be  elected  annually.  The 
method  of  electing  such  directors  at  the  annual  meet- 


COMMERCIAL   LAW  213 

ing  is  usually  provided  for  by  the  statutes  of  the  vari- 
ous States,  but  it  is  commonly  the  rule  that  each  stock- 
holder shall  have  one  vote  for  each  share  of  stock 
owned  by  him,  although  in  some  States  they  also  al- 
low what  is  termed  "cumulative  voting."  This 
method  of  voting  generally  allows  each  stockholder  to 
have  as  many  votes  as  he  owns  shares  of  stock  multi- 
plied by  the  number  of  directors  to  be  elected  at  the 
meeting  and  he  may  cast  all  of  his  votes  for  one  or 
more  of  the  candidates.  In  other  words  if  five  di- 
rectors are  to  be  elected  he  may  concentrate  all  his 
votes  upon  one  or  more  of  the  candidates  and  is  not 
compelled  to  vote  for  each  one.  This  cumulative  vot- 
ing is  authorized  for  the  purpose  of  allowing  the 
minority  stockholders  to  concentrate  their  votes  upon 
one  or  two  of  the  candidates  and  thus  have  some  rep- 
resentation upon  the  board  of  directors.  As  an  il- 
lustration of  this,  let  us  assume  that  the  X  Company 
had  an  authorized  capital  stock  of  $100,000,  composed 
of  1,000  shares  at  the  par  value  of  $100  per  share,  and 
that  all  these  1,000  shares  are  issued  and  fully  paid 
up.  Let  us  further  assume  that  six  individuals  each 
own  100  shares  of  stock  and;  act  in  unison,  thereby 
constituting  a  majority,  the  other  400  shares  of  stock 
being  held  by  the  minority  stockholders.  Each  stock- 
holder would  usually  have  one  vote  for  each  share  of 
stock  owned  by  him,  and  therefore,  if  five  directors 
were  to  be  elected  under  the  usual  method  of  voting, 
those  individuals  composing  the  majority  of  the  stock- 
holders would  succeed  in  casting  a  majority  of  votes 
for  each  of  the  five  directors.    This  would  leave  the 


214  COMMERCIAL   LAW 

minority  without  representation  upon  the  board.  If, 
however,  cumulative  voting  were  used,  the  minority 
having  a  total  of  2,000  votes  (400  multiplied  by  5, 
the  number  of  directors  to  be  elected)  could  concen- 
trate 2,000  votes  upon  one  or  two  of  their  candidates 
and  this  would  probably  insure  the  election  of  such 
candidates  to  the  board,  thus  giving  the  minority  rep- 
resentation. In  the  case  of  a  non-stock  or  member- 
ship corporation,  each  member  has  simply  one  vote 
for  directors  or  for  other  purposes.  It  may  be  noted 
that  the  directors  themselves,  in  their  meetings,  have 
also  one  vote  each  and  this  is  entirely  independent  of 
the  amount  of  stock  which  they  may  own  in  the  cor- 
poration. It  should  also  be  noted  that  the  directors  in 
their  meetings  may  not  vote  by  proxy,  but  sometimes 
the  members  of  a  membership  corporation  may  vote 
in  this  way.  Voting  by  proxy  is  a  usual  practice  in 
stock  corporations.  A  proxy  is  merely  a  power  of  at- 
torney or  agency  given  in  writing  by  one  stockholder 
whereby  he  authorizes  another  person  as  his  proxy 
to  vote,  at  a  corporate  meeting,  his  shares  of  stock 
in  his  place.  A  proxy  should  be  in  writing  and  in  a 
form  in  accordance  with  the  statutes  of  the  State  in- 
volved, and  is  often,  but  not  necessarily,  under  seal. 
A  stockholder  who  has  given  a  proxy  may  revoke  it 
whenever  he  chooses  and  this  would  prevent  the 
holder  of  the  proxy  from  voting  on  it.  This  would 
be  entirely  independent  of  whether  the  person  giving 
the  proxy  had  by  revoking  it  violated  his  contract 
with  the  person  to  whom  it  was  given.  That  contract 
would  be  only  a  private  matter  between  them. 


COMMERCIAL    LAW     .  215 

VOTING  TRUSTS.— The  proxy  principle  is  in- 
volved in  what  are  termed  "voting  trusts."  These  ar- 
rangements involve  the  placing  by  a  number  of  stock- 
holders of  their  stock  in  the  hands  of  certain  persons, 
giving  to  the  latter  the  right  to  vote  on  the  stock ;  in 
other  words,  it  is  a  concentration  of  the  stock  of  a 
number  of  persons  in  the  hands  of  one  or  a  few  per- 
sons. The  latter  are  termed  "voting  trustees."  It  is 
necessary  to  consult  the  statutes  of  the  various  States 
with  regard  to  the  legality  of  such  voting  trusts,  but 
they  are  generally  permitted,  with  the  restriction, 
however,  that  the  agreement  under  which  the  stock  is 
deposited  with  the  voting  trustee  or  trustees  must  be 
in  writing  and  that  any  stockholder  may  have  the 
right  to  deposit  his  stock  with  such  trustee  or  trus- 
tees and  become  a  party  to  the  voting  trust.  The 
statutes  also  frequently  limit  the  time  during  which 
such  a  voting  trust  may  continue. 

ISSUE  OF  STOCK.— The  stock  of  a  corpora- 
tiorH  is  in  theory  issued  for  an  amount  of  money  or 
property  equal  to  the  par  value  of  the  stock.  In  prac- 
tice, however,  in  many  States  there  is  no  limitation 
on  the  valuation  which  the  promoters  of  a  corpora- 
tion may  put  upon  the  property  or  rights  which  are 
transferred  to  the  corporation.  The  stock  is  regarded 
as  fully  paid  in  if  property  transferred  to  it  is  trans- 
ferred as  having  the  assumed  value  of  the  corpora- 
tion's capital,  however  little  the  property  may  actually 
be  worth.  In  other  States,  however,  an  official  must  ap- 
prove the  valuation  put  upon  property  transferred 
as  payment  for  stock,  and  in  such  States  it  may  be 


216  COMMERCIAL    LAW 

assumed  that  the  assets  of  a  corporation  when  it  be- 
gins business  represent  at  least  approximately  the 
amount  of  its  capital  stock ;  even  in  such  States,  how- 
ever, there  is  no  difficulty  in  promoting  a  corporation 
which  shall  have  a  large  capital  though  its  property 
is  of  slight  value.  All  that  is  necessary  is  to  incor- 
porate under  the  laws  of  another  State  which  allows 
greater  freedom.  Corporations  organized  in  one 
State  are  in  general  allowed  to  do  business  in  other 
States;  so  that  a  corporation  which  is  intended  to 
carry  on  business  in  New  York,  may  be  incorporated 
in  another  State,  where  it  is  not  expected  to  do  busi- 
ness. 

PROCEDURE  IN  ISSUING  BONDS.— It  is 
sometimes  difficult  for  the  investor  fully  to  appreciate 
the  vast  amount  of  detail  work  involved  in  the  bring- 
ing out  of  a  new  bond  issue.  Before  the  investment 
banker  underwrites  the  issue,  or  makes  his  purchase 
from  the  corporation — before  the  bonds  are  offered  to 
the  public — there  is  always  a  painstaking  and  minute 
investigation  of  the  new  security  from  many  different 
viewpoints,  made  by  and  in  behalf  of  the  banker.  The 
investor  can  never  know  from  the  banker's  printed 
circular,  descriptive  of  the  issue,  the  great  amount  of 
original  work  which  underlies  it  and  of  which  it  is  a 
meager  reflection.  The  circular  is  a  summary  of  the 
banker's  investigation ;  it  contains  the  salient  features 
of  the  issue  and  of  the  issuing  corporation,  reduced 
to  terms  that  are  intelligible  to  the  average  layman. 
It  Is  a  statement  of  the  principal  facts  which  led 
the  banker  to  make  an  investigation  of  the  busi- 


COMMERCIAL    LAW  217 

ness  and  upon  which  investigation  he  bases  his 
recommendation  of  the  security  offered  by  him  to  his 
clients. 

WHAT  IS  A  BOND?— This  can  be  explained 
best  by  comparing  it  with  a  real  estate  bond  and  mort- 
gage, the  nature  of  which  has  already  been  discussed. 
When  money  is  loaned  on  real  estate,  the  mortgagor, 
or  the  one  who  borrows,  executes  two  papers  in  favor 
of  the  mortgagee,  or  the  lender.  The  first  is  either  a 
promissory  note  or  a  bond.  The  bond  is  a  sealed  writ- 
ing whereby  the  borrower  binds  himself,  his  heirs,  ad- 
ministrators or  executors,  or  assigns,  to  pay  the  lender 
a  given  sum  of  money  at  a  specified  time,  together 
with  interest.  The  second  paper  given  as  security  for 
the  note  or  bond,  is  a  mortgage,  which  conveys  the 
title  to  the  property  to  the  lender,  with  the  provision, 
however,  that  if  the  borrower  satisfies  the  conditions 
imposed  in  the  bond — that  is,  the  payment  of  a  certain 
sum  of  money  at  a  given  time,  together  with  interest 
as  agreed — this  conveyance  (mortgage)  is  to  be  held 
null  and  void. 

WHAT  IS  A  CORPORATION  INDENTURE? 
— The  indenture  is  a  more  lengthy  instrument  than 
the  bond,  and,  as  will  be  noted,  it  is  called  an  "in- 
denture" and  not  a  "mortgage."  The  mortgage 
strictly  is  only  that  portion  of  the  indenture  whereby 
the  property  is  conveyed  or  deeded  to  the  mortgagee, 
with  the  provision  that  the  deed  so  given  is  to  be  held 
null  and  void  in  the  event  that  the  conditions  named 
in  the  bond  are  faithfully  carried  out.  The  indenture 
is  broader  than  the  mortgage;  it  contains  provisions 


218  COMMERCIAL    LAW 

other  than  those  bearing  directly  on  the  mortgage. 
An  indenture  is  a  sealed  agreement  between  two  or 
more  parties  and  any  number  of  provisions  may  be 
inserted  in  it,  in  addition  to  the  mortgage  clauses,  as 
may  be  deemed  necessary  or  desirable.  It  is  always 
possible  for  the  individual  to  obtain  a  loan  secured  by 
a  lien  on  his  property,  provided  the  security  is  good 
and  considered  ample.  If,  however,  his  property  was 
of  so  great  value  that  he  desired  to  obtain  a  loan  of 
several  millions  of  dollars,  he  would  find  it  difficult, 
or  even  impossible,  to  find  any  one  person  willing  to 
lend  him  so  large  an  amount.  If,  however,  the  bor- 
rower could  find  a  number  of  persons  who  could  and 
would  jointly  contribute  enough  money  to  equal  the 
amount  of  the  loan,  he  could  divide  this  total  amount 
into  equal  parts  and  each  lender  could  have  such  a 
proportionate  interest  as  might  be  desired.  This,  then, 
is  the  case  with  large  corporations,  which  are  legal- 
ized persons.  Owing  to  the  fact  that  the  holders  of 
the  bonds  have  only  a  fractional  interest  in  the  loan 
and  therefore  in  any  property  that  may  be  pledged  to 
secure  it,  it  is  impossible  to  create  separate  mortgages 
in  favor  of  the  individual  bondholders  on  any  particu- 
lar part  of  the  property.  No  portion  of  the  property 
can  be  specifically  designated — the  interests  of  the 
bondholders  are  in  common.  For  this  reason  and 
others,  corporations  are  obliged  to  create  what  is 
known  as  a  Mortgage  Deed  of  Trust — making  the 
mortgage  to  secure  the  many  bonds  in  favor  of  some 
responsible  individual  or  trust  company,  who  holds 
it  on  behalf  of  the  various  bondholders  in  accordance 


COMMERCIAL    LAW  219 

with  the  definite  terms  of  the  trust,  and  who  is  there- 
fore known  as  the  Trustee.  The  indenture  of  the  cor- 
poration must  in  addition  to  covering  the  mortgage, 
contain  other  related  and  necessary  covenants,  especi- 
ally as  to  the  trust  that  must  be  created.  As  there 
are  so  many  covenants  or  provisions  necessary  in 
order  to  fully  protect  all  interests  concerned,  the  cor- 
poration indenture  becomes  bulky,  but  its  form  in 
substance  is  not  very  different  from  that  of  the  bond 
and  mortgage  of  the  individual,  which  we  have  al- 
ready analyzed,  and  which  for  this  reason  it  is  well 
for  us  to  keep  in  mind  as  we  follow  the  corporation 
indenture. 

ANALYSIS  OF  INDENTURES.— The  inden- 
ture, or  agreement,  must  of  necessity  be  made  between 
certain  parties,  the  mortgagor  or  the  corporation  and 
the  mortgagee,  in  this  case  the  Trustee  who  holds  the 
security  given  in  trust  for  the  various  bondholders. 
It  is,  therefore,  proper  that  we  recite  at  the  very  be- 
ginning of  the  indenture  the  parties  in  interest,  giving 
their  legal  residence,  or  as  in  the  case  of  corporations 
the  names  of  the  States  wherein  they  are  incorpo- 
rated. It  isiquite  essential  that  we  know  in  what  State 
a  corporation  was  incorporated,  as  its  rights  and  priv- 
ileges are  determined  by  the  statutes  of  the  State 
which  created  it  and  by  the  charter  which  has  been 
granted  to  it.  What  are  our  reasons  for  creating  the 
indenture?  The  very  first  premise  is  that  the  cor- 
poration is  legally  able  to  borrow  money  by  law.  If 
it  did  not  have  this  right  we  could  proceed  no  further. 
To  borrow  money  and  mortgage  or  pledge  property 


220  COMMERCIAL    LAW 

as  security  therefor  is  a  common  law  right  of  corpora- 
tions, but  the  amount  which  may  be  borrowed  is 
sometimes  limited  by  State  statutes.  In  the  event 
that  the  corporation  desired  to  borrow  in  excess  of  the 
limitation,  additional  capital  stock  is  sometimes  au- 
thorized thereby  creating  a  larger  basis  for  borrow- 
ing. If  this  premise  is  not  incorporated,  its  omission 
does  not  affect  the  status  of  the  indenture,  but  it  is 
generally  placed,  as  many  other  premises  are,  in  the 
indenture,  for  the  sake  of  logic,  and  to  show  that  the 
matter  has  been  considered,  and  that  the  fact  is  ad- 
mitted by  the  parties  to  the  indenture.  The  purpose 
for  which  the  bonds  are  to  be  issued  is  sometimes  duly 
set  forth,  as  for  instance,  to  refund  certain  maturing 
obligations,  to  construct  a  certain  extension,  to  build 
new  terminals,  etc.  While  the  purpose  may  not  al- 
ways be  mentioned  in  the  indenture,  nevertheless  it 
must  accord  with  the  charter  of  the  corporation  and 
the  laws  of  the  State.  The  company  cannot  exceed 
the  powers  that  have  been  granted  to  it.  We  next 
want  to  know  whether  the  authority  to  borrow  money 
and  issue  bonds  therefor  has  been  obtained  in  lawful 
manner.  Provisions  covering  the  manner  of  securing 
this  authority  will  be  found  in  the  by-laws  of  the  cor- 
poration, and  the  counsel  must  examine  this  matter 
carefully  in  order  to  see  whether  all  legal  formalities 
have  been  strictly  observed  and  whether  the  resolu- 
tions are  in  proper  order.  There  are  certain  essential 
facts  that  must  be  stated  in  the  bonds  themselves  and 
which  are  elaborated  in  the  covenants  of  the  inden- 
ture.   These  facts  are  embodied  in  the  resolutions  of 


COMMERCIAL    LAW  221 

the  Board  of  Directors  and  of  the  stockholders  and 
are,  therefore,  incorporated  in  the  premises  of  the 
indenture.  These  facts  include  the  total  amount  of 
bonds  authorized,  title,  denomination,  form,  date  of 
issue  and  maturity,  rate  of  interest  and  where  payable. 
In  order  that  there  may  be  uniformity  in  the  wording 
and  form  of  the  bonds,  so  that  no  one  holder  will  per- 
chance receive  an  undue  advantage  over  any  other 
bondholder,  the  form  of  the  bond,  its  coupons  and 
trustee's  certificate  must  be  duly  set  forth  in  the  in- 
denture. 

LIMITATION  OF  POWERS  OF  DIREC- 
TORS.— There  are  various  matters  wherein  directors 
of  any  corporation  do  not  usually  have  power  to  act 
on  behalf  of  the  corporation  without  special  authoriza- 
tion. Such  matters  include  the  amendment  of  the 
corporate  charter  (thereby  changing  the  purposes  of 
the  corporation),  the  change  of  the  name  of  the  cor- 
poration, the  increase  or  decrease  of  authorized  capi- 
tal stock,  the  sale  of  the  total  corporate  assets  and 
franchise,  the  consolidation  of  the  corporation  where 
permitted  by  statute,  and  the  giving  of  mortgages 
upon  the  corporate  property.  This  last  point  is  espe- 
cially important  since  the  validity  of  a  corporate 
mortgage  as  security  for  a  loan  of  money  depends 
upon  whether  the  mortgage  was  authorized  and  given 
in  all  respects  pursuant  to  statute  of  the  State  in- 
volved. As  these  corporate  mortgages  not  only  are 
given  as  security  for  a  single  loan  of  money  but  also 
furnish  security  often  for  very  large  amounts  of  bonds, 
the  matter  of  the  authority  of  the  directors  and  the 


222  COMMERCIAL    LAW 

validity  of  the  mortgage  becomes  of  great  importance. 
Therefore  the  statutes  of  the  State  involved  must  be 
followed  closely  as  to  the  procedure  in  connection 
with  the  giving  of  a  mortgage.  It  may  be  stated,  how- 
ever, with  regard  to  this  matter  and  the  other  special 
matters  mentioned,  the  statutes  generally  provide 
that  some  form  of  authorization  should  be  obtained 
from  the  stockholders,  generally  through  their  vote  at 
a  special  meeting  called  for  that  purpose,  of  which 
proper  notification  and  announcement  have  been 
given ;  that  some  form  of  certificate  as  to  the  proceed- 
ings at  such  meeting  be  made  and  filed  by  the  secre- 
tary and  treasurer  or  other  designated  officer  of  the 
corporation;  that  it  should  also  be  filed  in  the  office 
of  the  county  clerk  of  the  county  involved  and  in  the 
office  of  the  Secretary  of  State;  and  that  some  noti- 
fication of  the  act  in  question  be  also  given  to  the 
directors  as  well  as  the  stockholders.  It  is,  of  course, 
impossible  to  take  up  the  details  as  to  such  matters, 
the  only  safe  course  to  pursue  being  to  follow  with 
extreme  care  the  statutes  of  the  State  wherein  such 
action  is  to  be  taken.  From  the  foregoing,  however, 
the  general  purpose  and  effect  of  prevailing  law  may 
be  seen. 

DIVIDENDS  ON  STOCK.— Dividends  on  the 
stock  of  corporations  are  declared  by  the  directors, 
v\7ho  have  power  to  use  their  discretion  as  to  the 
amount  to  be  disbursed  in  this  way.  The  statutes 
are,  however,  very  explicit  in  prohibiting  the  declara- 
tion of  any  dividends  except  out  of  the  surplus  profits 
of  the  business  conducted  by  the  corporation.    With 


COMMERCIAL    LAW  223 

respect  to  dividends  properly  declared,  the  declaration 
of  the  directors  generally  provides  that  they  shall  be 
paid  to  all  stockholders  registered  upon  the  books  of 
the  company  at  a  specified  date  in  the  future.  Hence, 
if  a  stockholder  should  sell  or  otherwise  transfer  his 
stock,  after  that  date  to  another  person,  the  latter, 
v^hile  becoming  the  owner  of  the  stock,  would  not  be 
entitled  to  the  dividend  when  paid.  It  would  be  pay- 
able to  the  former  stockholder,  although  he  might, 
pursuant  to  the  agreement  made  with  the  person  to 
whom  he  sold  the  stock,  turn  over  to  the  latter  the 
amount  of  the  dividend. 

CUMULATIVE  DIVIDENDS.— It  frequently 
happens  that  a  corporation  does  not  earn  any  divi- 
dends in  a  particular  year.  The  question  arises,  is  the 
holder  of  a  7%  preferred  stock  in  a  position  to  de- 
mand that  the  dividend  be  paid  the  following  year. 
Suppose  the  corporation  earns  nothing  in  1921  and 
earns  14%  in  1922.  The  holder  of  one  share  of  a 
non-cumulative  preferred  stock  would  receive  the 
usual  7%  dividend  only  in  1922.  If  the  stock  were 
cumulative  he  would  receive  14%.  In  other  words 
the  unearned  dividends  accumulate  and  become  a 
charge  which  the  corporation  must  pay  when  suffi- 
cient is  earned  in  prosperous  years  before  the  holders 
of  common  stock  are  entitled  to  receive  any  dividend. 
Usually  the  stock  certificate  and  the  articles  of  incor- 
poration specify  whether  stock  is  cumulative  or  non- 
cumulative.  If  they  do  not,  then  reference  to  the  law 
of  the  State  where  the  company  is  incorporated,  is 
necessary  to  decide  such  a  question. 


224  COMMERCIAL    LAW 

LIABILITY  OF  OFFICERS  AND  DIREC- 
TORS TO  THE  CORPORATION.— Whether  a  cor- 
poration becomes  liable  by  virtue  of  action  taken  by 
its  officers  or  directors  depends  upon  principles  of 
agency  applied  to  the  law  of  corporations.  These 
principles  have  already  been  stated.  Whether  the 
directors  or  officers  are  themselves  personally  liable 
is  another  matter.  Conceivably  they  may  be  liable 
either  to  their  employer  (the  corporation)  or  to  credi- 
tors of  the  corporation.  They  are  not  directly  liable 
to  the  shareholders  as  such.  Any  injury  or  v/rong 
they  may  indirectly  do  to  shareholders  is  directly  done 
to  the  corporation,  the  shareholders  being  injured 
only  because  the  corporation  in  which  he  is  interested 
is  injured.  Shareholders  may,  however,  institute  pro- 
ceedings against  directors  or  officers  if,  as  not  infre- 
quently happens,  the  corporation  itself,  being  con- 
trolled by  the  wrongdoers,  fails  to  take  proceedings. 
The  shareholders  in  such  a  case,  however,  demand  re- 
dress for  the  corporation,  not  for  themselves;  and 
whatever  may  be  recovered,  is  recovered  for  the  bene- 
fit of  the  corporation.  The  duty  of  the  directors  and 
officers  of  the  corporation  is  analogous  to  the  duty  of 
any  agent  to  his  principal.  That  is,  each  officer  or 
director  must  exercise  reasonable  diligence  in  the  per- 
formance of  his  work  and  must  observe  fidelity  to  his 
principal.  The  application  of  these  principles  to  par- 
ticular fact  is  not  always  easy,  but  the  principles 
themselves  are  plain.  Especially  the  degree  of  care 
which  directors  are  bound  to  use  presents  a  trouble- 
some question  of  fact.    In  a  small  business  it  may  be 


COMMERCIAL   LAW  225 

the  duty  of  a  director  to  take  active  control  of  the 
policy  of  the  company  and  supervise  with  some  min- 
uteness each  business  operation.  Such  direction  is 
impossible  where  a  great  railroad  or  industrial  cor- 
poration is  concerned.  In  such  a  case  directors  neces- 
sarily derive  their  information  from  subordinate 
agents  and  cannot  investigate  facts  for  themselves. 
Directors  are  not  liable  for  mistakes  of  judgment  if 
they  use  reasonable  care;  if,  however,  they  wilfully 
do  an  act  which  they  know  is  not  authorized  by  the 
charter  or  by-laws  of  the  corporation,  they  will  be 
liable  for  the  consequences.  Directors  who  are  cogni- 
zant of  wrongs  committed  by  their  co-directors  and 
fail  to  take  available  measures  to  prevent  the  wrongs, 
become  liable  themselves.  Directors  may  terminate 
their  liability  for  future  acts  by  resigning,  but  resig- 
nation will  not  destroy  liability  for  acts  already  done 
even  though  the  resulting  damage  does  not  happen 
until  after  resignation.  The  corporation  requires  that 
a  director  or  other  officer  shall  not  act  on  behalf  of 
the  corporation  in  a  matter  in  which  he  has  a  per- 
sonal interest  at  variance  with  that  of  the  corporation. 
Should  matters  of  this  sort  arise,  as  they  often  do, 
the  interested  officer  or  director  should  not  take  part 
in  the  decision  of  the  question,  and  may  render  him- 
self liable  if  he  does  so. 

LIABILITY  OF  OFFICERS  TO  CREDI- 
TORS.— So  long  as  a  corporation  is  solvent,  credi- 
tors of  the  corporation  have  no  reason  or  right  to  seek 
redress  from  any  one  but  the  corporation  itself.  Credi- 
tors of  an  insolvent  corporation,  however,  may  enjoin 


226  COMMERCIAL   LAW 

action  by  the  company's  officers  which  is  unauthorized 
or  likely  to  prove  detrimental  to  the  assets  of  the  cor- 
poration. If  the  officers  knowingly  misapply  the  as- 
sets of  an  insolvent  corporation  they  are  personally 
liable  to  the  creditors  for  the  injury  caused  thereby. 
They  are  liable  sometimes  by)  statute,  but  also  even 
apart  from  statute,  for  false  statements  of  the  condi- 
tion of  the  corporation  in  reliance  upon  which  credit 
is  given  the  corporation.  Like  other  agents,  the  offi- 
cers of  a  corporation  impliedly  warrant  to  persons 
with  whom  they  deal  their  authority  to  do  the  acts 
which  they  undertake;  and  if  authority  is  lacking,  they 
are  liable  personally.  The  only  qualification  of  this 
principle  is  that  if  the  facts  from  which  authority,  or 
lack  of  it,  may  be  determined,  are  known  to  the  person 
dealing  with  them,  they  are  not  liable;  that  is,  they 
do  not  warrant  the  correctness  of  an  inference  of  au- 
thority from  known  facts. 

LIABILITY  OF  BANK  OFFICERS. -- The 
principles  governing  the  liability  of  bank  directors  and 
other  officers  of  a  bank  are  the  same  as  those  which 
govern  similar  questions  regarding  other  corpora- 
tions. The  bank  laws,  however,  impose  certain  duties 
and  penalties  which  affect  the  application  of  general 
principles.  It  may  be  worth  while  to  enumerate 
briefly  some  of  the  duties  of  different  bank  officers, 
a  violation  of  which  renders  them  personally  liable. 
As  to  directors  it  has  been  said  that  *'It  is  not  neces- 
sary to  show  directly  that  the  directors  actually  had 
their  attention  called  to  the  mismanagement  of  the 
affairs  of  the  bank,  or  to  the  misconduct  of  subordi- 


COMMERCIAL    LAW  227 

nate  officers.  It  is  sufficient  to  show  that  the  evidence 
of  the  management  or  misconduct  were  such  that  it 
must  have  been  brought  to  their  knowledge  unless 
they  were  grossly  negligent  or  wilfully  careless  in 
the  discharge  of  their  duties."  They  are  liable  for 
the  consequences  not  only  of  their  own  fraud  but  of 
their  ultra  vires  acts.  They  are  liable  for  approving 
the  discount  of  notes  known  to  be  worthless  or  of 
so  doubtful  value  as  to  be  obviously  unsafe.  If  guilty 
of  negligence  in  failing  to  discover  that  such  paper 
was  worthless  they  may  also  be  liable.  They  are 
guilty  of  negligence  and  may  thereby  render  them- 
selves liable  if  they  wholly  neglect  to  ascertain  the 
condition  of  the  bank  from  its  books,  though  a  thor- 
ough examination  of  the  books  of  a  bank,  especially 
of  one  transacting  a  large  business,  cannot  be  ex- 
pected of  every  director;  and  the  law  would  require 
no  more  than  would  be  demanded  by  the  standard  of 
reasonableness. 

THE  PRESIDENT.— The  duties  of  the  presi- 
dent, and  consequently  his  liabilities,  must  be  de- 
termined by  general  law,  the  charter  of  the  particu- 
lar institution,  its  by-laws,  and  by  general  business 
usage.  Thus,  if  the  usage  exists  for  the  president  to 
draw  and  sign  checks  in  the  absence  of  the  cashier, 
the  president  will  have  authority  so  to  act.  He  has 
authority  to  conduct  the  litigation  of  the  bank;  he 
may  employ  counsel.  He  may  generally  indorse  ne- 
gotiable paper  of  the  bank.  On  the  other  hand,  he 
will  be  personally  liable  if  he  permits  improper  loans 
or  over-drafts;  if  he  fails  to  give  proper  instructions 


228  COMMERCIAL   LAW 

to  inferior  officers;  if  it  is  his  duty  to  require  a  bond 
from  an  inferior  officer,  and  he  fails  to  do  so;  and, 
generally,  if  he  commits  a  breach  of  duty  to  the  cor- 
poration which  causes  damage.  He  has  no  power 
to  execute  deeds  of  real  estate  without  authority  of 
the  directors  and,  generally,  an  instrument  which 
must  be  executed  under  the  seal  of  the  bank  must  be 
authorized  by  the  board.  The  discount  of  negotiable 
paper  also  is  a  duty  of  the  directors. 

THE  CASHIER.— The  Supreme  Court  of  Maine 
has  thus  expressed  the  functions  of  the  cashier  of  a 
bank :  "A  cashier,  it  is  well  known,  is  allowed  to  pre- 
sent himself  to  the  public  as  habitually  accustomed 
to  make  pajmient  for  its  bills  or  notes  payable  to 
other  persons;  to  make  payment  for  bills  and  notes 
discounted  by  the  directors;  to  receive  payment  for 
bills  of  exchange,  notes,  and  other  debts  due  to  the 
bank;  to  receive  money  on  deposit  and  to  pay  the 
same  to  the  order  of  the  depositors.  He  is  presented 
as  having  the  custody  of  its  books,  bills  of  exchange, 
notes,  and  other  evidences  of  debt  due  to  it,  and,  in- 
deed, of  all  its  movable  property;  as  making  entry 
in  its  books  and  as  keeping  its  accounts  and  a  record 
of  its  proceedings.  In  many  banks  these  duties  are 
performed  in  part  by  tellers,  clerks,  or  assistants,  but 
generally,  it  is  believed,  under  his  superintendence, 
and  he  might  at  any  time  assume  the  performance  of 
them  and  perform  them,  if  able  to  do  so,  without  such 
assistance.  His  true  position  appears  to  be  that  of  a 
general  agent  for  the  performance  of  his  official  and 
accustomed  duties.     While  acting  within  the  scope 


COMMERCIAL    LAW  229 

of  this  authority  he  would  bind  the  bank,  although  he 
might  violate  his  private  instructions."  He  must  ex- 
ercise proper  oversight  over  subordinate  officers;  he 
must  use  reasonable  care  and  skill.  He  may  become 
liable  personally  for  failure  to  observe  instructions 
as  to  a  special  deposit;  for  the  improper  sale  of  stock 
held  as  security  for  a  loan;  for  improperly  making 
loans,  for  failure  to  give  essential  information  to  the 
directors;  for  failing  to  exercise  proper  oversight 
over  inferior  officers  or  agents,  as  well  as  in  the  more 
obvious  case  where  he  has  taken  advantage  of  his 
position  to  commit  intentional  fraud  upon  the  bank. 
BLUE  SKY  LAWS.— The  term  "blue  sky"  has 
become  very  familiar  to  the  corporation  lawyer  in  the 
last  few  years.  The  so-called  "blue  sky"  legislation  is 
a  well  meaning,  if  partly  futile,  attempt  to  meet  an  ex- 
isting evil  in  connection  with  the  sale  of  corporate 
securities.  We  shall  find  later  that  five  elements  are 
necessary  to  constitute  the  action  of  fraud  or  deceit: 
(1)  a  false  representation  of  a  material  fact;  (2)  made 
with  knowledge  of  its  falsity;  (3)  with  intent  that  it 
be  acted  upon;  (4)  that  it  be  acted  upon;  (5)  damage 
follows.  The  courts  have  almost  universally  held  that 
a  mere  statement  of  opinion  does  not  give  rise  to  a 
cause  of  action  for  fraud,  whereas  a  mistatement  of 
fact  does.  Hence  if  I  state  to  you  when  selling  you 
100  shares  of  the  Bonanza  Gold  Mining  Corporation 
that  the  company  has  never  paid  less  than  20  7o  in 
dividends  during  the  last  five  years  and  you  purchase 
the  stock  relying  on  this  misrepresentation  of  fact  (the 
situation  actually  being  the  company  has  never  paid  a 


230  COMMERCIAL    LAW 

dividend)  you  would  have  a  cause  of  action  in  deceit 
against  me.  If,  however,  I  had  simply  said  in  selling 
you  the  stock  that  the  outlook  for  the  company  was 
the  brightest  in  its  history,  that  the  president  had  told 
me  that  dividends  of  30%  a  year  were  assured  indef- 
initely and  that  this  stock  was  by  far  the  best  bargain 
which  had  been  on  the  market  in  over  a  year,  although 
I  know  when  I  made  such  statements  that  there  was 
little  or  nothing  to  substantiate  them,  nevertheless,  I 
would  not  be  liable  in  deceit.  My  statements  were 
merely  matters  of  opinion  or  what  we  call  "seller's 
talk"  or  "puffing  one's  wares." 

THE  FINANCIAL  PROSPECTUS.—If  you 
will  examine  the  average  financial  prospectus  of  a  new 
stock  being  offered  for  sale  to  the  public,  you  will  find 
that  when  most  of  the  high  sounding  terms  and  flat- 
tering statements  are  analyzed  carefully  that  they 
will  fall  in  this  second  class  of  non-actionable  state- 
ments. There  are  few  statements  of  fact  but  many 
glowing  statements  in  the  nature  of  "seller's  talk." 
We  all  know,  however,  that  enormous  quantities  of 
worthless  stock  are  sold  each  year  by  this  method. 
When  business  conditions  are  good  it  sometimes 
seems  as  if  the  wilder  the  scheme  the  easier  it  is  to 
find  a  gullible  public  ready  to  purchase  such  securi- 
ties. To  prevent  the  perpetration  of  such  frauds  on 
the  public  is  the  object  of  the  so-called  "blue  sky" 
legislation. 

THE  LAW  ANALYZED.— The  first  "blue  sky" 
law  was  passed  in  Kansas  in  1911.  The  evil  sought  to 
be  remedied  was  so  prevalent  that  the  idea  spread  rap- 


COMMERCIAL    LAW  231 

idly  and  now  similar  legislation,  of  one  type  or  an- 
other, has  been  enacted  in  a  majority  of  the  States. 
Some  of  the  acts  are  crude,  some  have  been  held  un- 
constitutional, and  many  are  difficult  of  enforcement. 
Recently,  however,  more  care  has  been  taken  in  draft- 
ing such  legislation,  and  many  of  the  earlier  laws  will 
undoubtedly  be  amended  to  conform  with  this  later 
legislation.  We  may  take  the  Illinois  statute  of  1919 
as  a  good  sample  of  a  drastic  yet  fairly  workable  Act. 
The  law  may  be  briefly  considered  from  three  stand- 
points: (1)  the  persons  affected;  (2)  the  securities 
affected;  (3)  the  penalties  provided  for  violation  of 
its  provisions. 

AS  TO  THE  PERSONS  AFFECTED.— Gen- 
erally any  person  offering  any  securities,  and  any  sel- 
ler's agent  or  broker,  the  issuer,  or  any  agent  or  direc- 
tor of  the  issuer,  or  any  owner  or  dealer,  is  covered  by 
the  Act.  Illinois  fiscal  corporations  such  as  banks, 
trust  companies,  insurance  companies,  building  and 
loan  associations  and  the  like  are  practically  exempt 
from  the  provisions  of  the  Illinois  securities  law. 

THE  ILLINOIS  ACT.— The  Illinois  act  covers 
the  following  securities : 

Section  3.  For  the  purposes  of  this  Act  securities 
are  divided  into  four  classes  as  follows : 

(1)  Securities,  the  inherent  qualities  of  which 
assure  their  sale  and  disposition  without  the  perpe- 
tration of  fraud,  which  shall  be  known  as  securities  in 
Class  "A"; 

(2)  Securities,  the  inherent  qualities  of  which,  or 
in  the  nature  of  one  or  both  parties  to  the  sale  thereof, 


252  COMMERCIAL   LAW 

assure  their  sale  and  disposition  without  the  perpetra- 
tion of  fraud,  which  shall  be  known  as  securities  in 
Class  "B"; 

(3)  Securities  based  on  established  income,  which 
shall  be  known  as  securities  in  Class  "C"; 

(4)  Securities  based  on  prospective  income, 
which  shall  be  known  as  securities  in  Class  "D"; 

Section  4.  Securities  in  Class  *'A"  shall  comprise 
securities : 

(1)  Issued  by  a  government  or  governmental 
agency,  or  by  anybody  having  power  of  taxation  of 
assessment ; 

(2)  Issued  by  any  National  or  State  bank  or  trust 
company,  building  and  loan  association  of  this  State, 
or  insurance  company  organized  or  under  the  supervi- 
sion of  the  Department  of  Trade  and  Commerce  of 
this  State ; 

(3)  Issued  by  any  corporation  operating  any 
public  utility  in  any  State  wherein  there  is  or  was  at 
the  time  of  issuance  thereof  in  effect  any  law  regulat- 
ing such  utilities  and  the  issue  of  securities  by  such 
corporation ; 

(4)  Appearing  in  any  list  of  securities  dealt  in  on 
the  New  York,  Chicago,  Boston,  Baltimore,  Phila- 
delphia, Pittsburgh,  Cleveland  or  Detroit  Stock  Ex- 
change, respectively,  pursuant  to  official  authorization 
by  such  exchanges,  respectively,  and  securities  senior 
to  any  securities  so  appearing ; 

(5)  Whereof  current  prices  shall  have  been 
quoted  from  time  to  time  for  not  less  than  one  year 
next  preceding  the  offering  for  sale  thereof,  in  tabu- 


COMMERCIAL    LAW  233 

lated  market  reports  published  as  news  items,  and  not 
as  advertising,  in  a  daily  newspaper  of  general  circu- 
lation, published  in  this  or  in  an  adjoining  State,  in- 
cluding the  State  of  Michigan,  not  including  any  trade 
paper  or  any  paper  circulating  chiefly  among  the  mem- 
bers of  any  trade  or  profession ; 

(6)  Issued  by  any  corporation  organized  not 
for  pecuniary  profit  or  organized  exclusively  for  edu- 
cational, benevolent,  fraternal,  charitable  or  reform- 
atory purposes ; 

(7)  Being  notes  or  bonds  secured  by  mortgage 
lien  upon  real  estate  or  leasehold  in  any  State  or  terri- 
tory of  the  United  States  or  in  the  Dominion  of  Can- 
ada, when  the  mortgage  is  a  first  mortgage  on  real 
estate,  and  when  in  case  it  is  not  a  first  mortgage  lien 
or  is  on  a  leasehold,  the  mortgage  and  notes  or  bonds 
secured  thereby  (not  including  interest  notes  or  cou- 
pons) shall  each  bear  a  legend  in  red  characters  not 
less  than  one-half  inch  in  height,  indicating  (1)  that 
the  mortgage  is  on  a  leasehold,  if  that  be  the  case,  and 
(2)  that  the  mortgage  is  a  junior  mortgage,  if  that  be 
the  case ; 

(8)  Being  a  note  secured  by  first  mortgage  upon 
tangible  or  physical  property,  when  such  mortgage 
is  assigned  with  such  securities  to  the  purchaser; 

(9)  Evidencing  indebtedness  due  under  any  con- 
tract made  in  pursuance  to  the  provisions  of  any 
statute  of  any  State  of  the  United  States  providing 
for  the  acquisition  of  personal  property  under  condi- 
tional sale  contract; 

(10)  Being  negotiable  promissory  notes  given 


234  COMMERCIAL   LAW 

for  full  value  and  for  the  sole  purpose  of  evidencing 
or  extending  the  time  of  payment  of  the  price  of 
goods,  wares  or  merchandise  purchased  by  the  issuer 
of  such  notes  in  the  ordinary  course  of  business,  and 
commercial  paper  or  other  evidence  of  indebtedness 
running  not  more  than  twelve  months  from  the  date 
of  issue ; 

(11)  Being  subscriptions  for  the  capital  stock 
under  any  license  issued  to  commissioners  to  incorpo- 
rate a  company  under  the  laws  of  this  State  where  no 
commission  or  other  remuneration  paid  for  the  sale 
or  disposition  of  such  securities; 

Securities  in  Class  "A"  and  the  sales  thereof  shall 
not  be  subject  to  the  provisions  of  this  Act. 

Section  5.  Securities  in  Class  "B"  shall  comprise 
securities : 

(1)  Sold  by  the  owner  for  the  owner's  account 
exclusively  when  not  made  in  the  course  of  continued 
and  repeated  transactions  of  a  similar  nature ; 

(2)  Increased  capital  stock  of  a  corporation  sold 
or  distributed  by  it  among  its  stockholders  without 
the  payment  of  any  commission  or  expense  to  solici- 
tors, agents  or  brokers  in  connection  with  the  distri- 
bution thereof; 

(3)  Sold  by  or  to  any  bank,  trust  company,  or  in- 
surance company  or  association  organized  under  any 
law  of  this  State  or  of  the  United  States,  or  doing  busi- 
ness in  this  State  under  the  supervision  of  the  Depart- 
ment of  Trade  and  Commerce;  or  of  the  auditor  of 
Public  Accounts ;  or  by  or  to  any  building  and  loan  as- 
sociation organized  and  doing  business  under  the  laws 


COMMERCIAL    LAW  235 

of  this  State,  or  any  public  sinking  fund  trustees ;  or 
to  any  corporation  or  dealer  or  broker  in  securities; 

(4)  Sold  or  offered  for  sale  at  any  judicial,  ex- 
ecutor's or  administrator's  sale,  or  at  any  sale  by  a 
receiver  or  trustee  in  insolvency  or  bankruptcy,  or  at 
a  public  sale  or  auction  held  at  an  advertised  time 
and  place; 

Securities  in  Class  **B,"  when  disposed  of  by  the 
persons  and  in  the  manner  provided  by  this  section, 
shall  not  be  subject  to  the  provisions  of  this  Act. 

Section  6.  Securities  in  Class  "C"  shall  comprise 
the  following : 

Those  issued  by  a  person,  corporation,  firm,  trust, 
partnership  or  association  owning  a  property,  business 
or  industry,  which  has  been  in  continuous  operation 
not  less  than  two  years  and  which  has  shown  net 
profits,  exclusive  of  all  prior  charges,  as  follows: 

(1)  In  the  case  of  interest-bearing  securities  not 
less  than  one  and  one-half  times  the  annual  interest 
charge  upon  all  outstanding  interest-bearing  obliga- 
tions ; 

(2)  In  the  case  of  preferred  stock  not  less  than 
one  and  one-half  times  the  annual  dividend  on  such 
preferred  stock; 

(3)  In  the  case  of  common  stock  not  less  than 
3%  per  annum  upon  such  common  stock. 

Section  7.  Securities  in  Class  "C"  may  be  dis- 
posed of,  sold  or  offered  for  sale  upon  compliance  with 
the  following  conditions,  and  not  otherwise : 

A  statement  shall  be  filed  in  the  office  of  the  Sec- 
retary' of  State : 


236  COMMERCIAL    LAW 

(1)  Describing  the  evidence  of  indebtedness,  pre- 
ferred stock  or  common  stock  intended  to  be  offered 
or  sold ; 

(2)  Stating  the  law  under  which  and  the  time 
when  the  issuer  was  organized ; 

(3)  Giving  a  detailed  statement  of  the  assets  and 
liabilities  of  such  issuer  and  income  of  profit  and 
loss  statement,  and  giving  an  analysis  of  surplus 
account ; 

(4)  Giving  the  names  and  addresses  of  its  prin- 
cipal officers  and  of  its  directors  or  trustees ; 

(5)  Giving  pertinent  facts,  data  and  information 
establishing  that  the  securities  to  be  offered  are  se- 
curities in  Class  "C." 

Such  statement  shall  be  verified  by  the  oath  of 
not  less  than  two  credible  persons  having  knowledge 
of  the  facts.  Not  less  than  twenty-five  copies  of  such 
statement,  wholly  printed  or  wholly  typewritten,  shall 
at  the  time  of  filing  the  original  statement  be  filed 
with  the  Secretary  of  State.  The  printed  or  type- 
written copies  so  filed  shall  bear  at  the  top  in  bold 
faced  type  the  expression : 

"Securities  in  Class  *C*  under  Illinois  Securities 
Law,"  followed  by  the  expression,  also  in  bold-faced 
type: 

"This  statement  is  prepared  by  parties  interested 
in  the  sale  of  securities  herein  mentioned.  Neither 
the  State  of  Illinois,  nor  any  officer  of  the  State,  as- 
sumes any  responsibility  for  any  statement  contained 
herein  nor  recommends  any  of  the  securities  described 
below." 


COMMERCIAL   LAW  237 

Section  8.  All  securities  other  than  those  falling 
within  Class  "A,"  "B"  and  "C,"  respectively,  shall  be 
known  as  securities  in  Class  "D." 

Section  9  gives  the  requisites  of  the  statement 
required  to  be  filed  with  the  Secretary  of  State  before 
securities  of  Class  "D"  may  be  sold.  Such  statement 
is  even  more  complete  than  that  required  in  Section  7. 

SALES  AND  CONTRACTS  VOID.  — Every 
sale  or  contract  in  violation  of  the  act  is  void,  and  the 
fines  vary  from  not  less  than  $100  to  not  more  than 
$25,000,  and  the  imprisonment  from  six  months  to 
five  years.  Although  there  is  great  need  for  a  Federal 
incorporation  act  there  is  even  greater  need  for  a  Fed- 
eral blue  sky  law.  With  different  acts  in  the  differ- 
ent States,  the  Illinois  act  being  simply  an  example, 
even  the  most  careful  business  man  may  unwittingly 
find  himself  in  a  position  where  he  has  violated  one  of 
these  laws  with  their  severe  penalties. 


CHAPTER  VII 


Transfer  of  Stock 

UNIFORM  TRANSFER  OF  STOCK.— Turn 
now  to  an  entirely  different  matter,  the  trans- 
fer of  stock.  A  stock  certificate  is  one  of  the 
quasi-negotiable  instruments  of  commerce,  at  com- 
mon law  not  fully  negotiable  like  bills  and  notes,  but, 
nevertheless,  having  some  of  the  attributes  of  nego- 
tiability, especially  in  States  where  what  is  called  the 
Uniform  Transfer  of  Stock  Act  has  been  enacted. 
This  statute  applies  only  to  corporations  of  those 
States  which  have  passed  the  statute. 

TWO  METHODS  OF  TRANSFERRING 
STOCK. — Stock  may  be  transferred  in  two  ways: 
first,  by  delivery  of  the  certificate  with  the  indorse- 
ment upon  it  of  the  owner  of  the  stock,  indicating 
that  he  assigns  or  authorizes  the  assignment  of  the 
stock,  and  second,  by  delivery  of  the  certificate,  with 
a  separate  document  of  assignment  attached  stating 
that  the  owner  of  the  certificate  assigns  or  author- 
izes the  transfer  of  the  stock.  This  second  method 
is  not  so  completely  good  as  the  first,  where  the 
assignment  is  on  the  certificate  itself,  because  if  for 
any  reason  the  separate  document  should  become 
detached  from  the  certificate,  the  transferee's  right 
would  not  be  apparent,  and  therefore  the  Transfer 
of  Stock  Act  provides  that  if  a  purchaser  should  get 
possession  of  the  stock  certificate  with  an  indorse- 
ment upon  it,  he  would  take  precedence  over  even  a 

238 


COMMERCIAL    LAW  239 

prior  assignee  who  had  a  separate  paper  assigning 
the  certificate  to  him.  Of  course,  after  the  transfer 
is  duly  registered  on  the  books  of  the  company,  then 
it  makes  no  difference  whether  that  transfer  was  se- 
cured by  means  of  a  separate  power  or  assignment 
or  by  means  of  one  written  on  the  certificate  itself. 
EFFECT  OF  TRANSFER  ON  THE  BOOKS 
OF  THE  COMPANY.— What  is  the  effect  of  trans- 
fer on  the  books  of  the  company?  Under  the  com- 
mon law,  stock  was  originally  transferable  just  like 
any  intangible  right,  merely  by  agreement  of  the 
parties,  to  which  requirement  was  added,  as  a  neces- 
sity when  stock  certificates  became  common,  the  de- 
livery of  the  certificate  itself.  But  it  was  convenient 
for  the  company  to  know  who  was  owner  of  its  stock. 
It  was  inconvenient  to  have  stockholders  buy  and  sell 
without  any  notice  to  the  company,  and  therefore  a 
common  by-law  was  that  stock  should  be  transferred 
only  on  the  books  of  the  company.  The  Uniform 
Transfer  of  Stock  Act  goes  back  partially  to  the  old 
rule,  since  the  transfer  of  the  certificate  with  the  in- 
dorsement or  separate  assignment  is  what  transfers 
the  stock,  not  the  transfer  on  the  books  of  the  com- 
pany; but  in  order  that  the  corporation  may  not  be 
inconvenienced  it  is  provided  that  the  corporation 
shall  have  the  right  to  pay  dividends  to  any  one  reg- 
istered on  the  books  of  the  company,  such  persons 
being  the  apparent  owners,  and  that  only  such  per- 
sons have  the  right  to  vote.  An  analogous  custom 
that  shows  the  importance  of  registration  of  stock 
transfers  on  the  books  of  the  company  is  the  registry 


240  COMMERCIAL   LAW 

of  deeds  in  the  transfer  of  real  estate.  It  is  the  deed, 
not  the  record  of  it,  which  creates  a  title,  but  an  un- 
recorded deed  may  be  defeated  by  creditors  or  pur- 
chasers! without  notice,  so  that  to  protect  himself 
fully  the  owner  of  land  is  obliged  to  record  his  deed. 
OWNERSHIP  OF  STOCK,  INDIVIDUAL- 
LY, IN  COMMON,  JOINTLY  AND  BY  FIDU- 
CIARIES.— Stock  may  be  owned  by  a  man  in- 
dividually, it  may  be  owned  by  several  persons  in 
common,  or  it  may  be  owned  by  several  persons  joint- 
ly, or  it  may  be  owned  by  a  person  in  a  fiduciary  ca- 
pacity, as  trustee,  executor  or  guardian.  What  is  the 
difference,  may  be  asked,  between  the  case  of  owner- 
ship of  stock  by  several  persons  in  common  and 
ownership  by  several  persons  jointly.  The  common 
law  drew  this  distinction  between  joint  right  and 
rights  merely  held  in  common;  that  a  joint  right  sur- 
vived to  the  survivors  when  one  of  them  died,  whereas 
a  right  held  in  common  passed,  on  the  death  of  one 
of  the  owners,  pro  rata  to  the  personal  representa- 
tives of  the  deceased.  Therefore  if  A,  B  and  C  own 
stock  jointly,  when  C  dies  A  and  B  are  the  owners. 
If  A,  B  and  C  own  the  stock  in  common.  A,  B  and  the 
executors  of  C  would  own  it  on  the  death  of  C.  Gen- 
erally where  several  persons  own  a  right  now,  they 
own  it  in  common,  but  there  are  two  notable  excep- 
tions— the  case  of  partnerships  and  the  case  of  trus- 
tees. Stock  held  in  the  name  o^  A,  B  and  C,  when 
A,  B  and  C  are  either  partners  or  trustees,  will  pass 
to  A  and  B  on  the  death  of  C.  C's  executor  will  not 
have  to  join  in  the  transfer. 


COMMERCIAL    LAW  241 

DIFFICULTIES  IN  TRANSFER  AFFECT 
PURCHASER    AND   ALSO    CORPORATION.— 

The  difficulties  in  the  transfer  of  stock  may  be  looked 
at  (1)  from  the  standpoint  of  a  purchaser  of  the  stock, 
including  within  the  name  of  purchaser  one  who  lends 
money  on  the  stock  as  well  as  one  who  buys  it,  and 
(2)  from  the  standpoint  of  the  corporation  whose 
duty  it  is  to  transfer  the  stock  on  its  books.  Gen- 
erally the  difficulties  which  confront  the  purchaser 
are  the  same  which  confront  the  corporation  when  it 
is  asked  to  transfer.  If  the  purchaser  should  get  a 
defective  right  when  he  bought,  then  the  corporation, 
if  it  should  transfer,  would  generally  get  into  trouble 
also. 

LEGAL  AND  EQUITABLE  DIFFICULTIES 
IN  TRANSFERS.— The  main  difficulties  which  arise 
may  be  divided  into  legal  and  equitable  difficulties. 
By  legal  difficulties  are  meant  cases  in  which  the  pur- 
chaser will  not  get  a  good  legal  title.  By  equitable 
difficulties,  cases  in  which  the  purchaser  will  get  a 
good  legal  title  but  which  will  be  subject  to  an  equit- 
able right  in  favor  of  some  other  person.  The  person 
who  has  an  equitable  right  cannot  reclaim  the  stock 
from  one  who  is,  or  succeeds  to  the  rights  of,  a  bona 
fide  purchaser  for  value  without  notice. 

LEGAL  DIFFICULTIES— FORGED  CER- 
TIFICATE.—First,  in  regard  to  legal  difficulties. 
The  certificate  of  stock  may  be  forged.  The  pur- 
chaser of  a  forged  certificate  of  stock,  of  course,  gets 
nothing  in  the  way  of  stock.  He  does  get  the  right, 
however,  to  sue  the  person  who  sold  him  the  stock  on 


242  COMMERCIAL   LAW 

an  implied  warranty  of  genuineness.  Analogous  to 
the  situation  of  the  purchaser  is  the  situation  of  the 
corporation  if,  on  receiving  a  forged  certificate  with 
a  request  for  a  transfer,  it  should  transfer  ownership 
on  the  books,  completing  the  transfer  by  issuing  a 
new  certificate ;  for  any  person  who  took  the  new  cer- 
tificate, even  though  he  was  a  bona  fide  purchaser  for 
value,  would  not  get  any  stock  in  the  corporation,  if 
all  authorized  stock  had  previously  been  issued.  The 
corporation  has  no  power  to  overissue  stock;  it  can- 
not emit  any  more  even  if  it  tries,  and  therefore 
the  purchaser  gets  no  stock.  He  does,  however,  get 
a  right  against  the  corporation.  The  corporation  has 
issued  what  purports  to  be  new  stock  to  him,  or  if 
he  is  a  remote  purchaser  he  has  paid  for  stock  in  re- 
liance on  a  certificate  which  the  corporation  has  is- 
sued. The  corporation  is  estopped,  as  the  legal 
phrase  is,  to  deny  the  validity  of  that  certificate  as 
against  one  who  has  thus  relied  on  its  acts.  The  re- 
sult is  that  the  corporation  is  bound  to  pay  to  him 
value  equivalent  to  that  of  real  stock,  because  the 
corporation  has  put  out  something  which  seems  to 
be  good  stock,  and  owing  to  the  act  of  the  corpora- 
tion the  purchaser  has  been  deceived. 

FORGED  ASSIGNMENTS.— A  second  legal 
difficulty  arises  where  the  indorsement  or  assignment 
of  the  certificate  is  forged.  Only  the  owner  of  stock 
can  sell  it.  Consequently,  if  anybody  else  attempts 
by  forgery  or  otherwise  to  make  a  transfer,  the  trans- 
fer will  be  ineffectual.  The  result  will  be  the  same  as 
though  the  whole  certificate  were  forged.    The  pur- 


COMMERCIAL    LAW  243 

chaser  under  the  forged  indorsement  will  get  noth- 
ing. If  the  corporation  relies  on  the  forged  indorse- 
ment and  issues  a  new  certificate,  it  will,  in  the  same 
way  as  in  the  case  of  a  new  certificate  issued  for  a 
wholly  forged  one,  be  liable  to  a  purchaser  for  value. 
It  is,  of  course,  of  vital  importance,  therefore,  to  make 
sure  that  indorsements  are  correct,  and  generally  it 
is  desirable  to  take  indorsed  certificates  only  from 
reliable  persons.  If  you  take  such  a  certificate  from 
a  reliable  person,  even  though  there  is  no  express 
guaranty  of  signatures  by  a  brokerage  house  or  other 
third  person,  as  there  often  is,  you  will  be  practically 
safe  because  of  the  implied  warranty  of  genuineness 
by  the  seller  which  applies  to  the  indorsement  on  cer- 
tificates as  well  as  to  cases  of  wholly  forged  certifi- 
cates. 

ASSIGNMENTS  BY  UNAUTHORIZED 
AGENT. — A  third  case  is  where  the  indorsement  is 
made  by  an  agent,  and  the  agent  has  no  authority  to 
act.  A  corporation  transferring  stock  should  require, 
and  a  purchaser  should  require,  the  clearest  evidence 
of  an  agent's  authority  if  the  signature  of  the  trans- 
feror is  made  by  an  agent.  It  is  not  only  necessary 
to  be  sure  that  the  agent's  authority  originally  ex- 
isted, but  it  is  necessary  to  be  sure  that  his  power  has 
not  been  revoked,  either  by  the  death  of  the  principal 
or  by  express  revocation  during  his  life.  A  question 
that  sometimes  is  troublesome,  in  regard  to  the  agent's 
authority  to  make  such  an  indorsement,  arises  where 
the  terms  of  the  power  given  the  agent  are  general; 
where  he  is  authorized  to  do  a  very  broad  class  of 


244  COMMERCIAL   LAW 

acts  for  the  principal,  but  no  specific  mention  is  made 
of  the  particular  certificate  which  he  seeks  to  trans- 
fer. Such  a  power,  if  it  certainly  includes  the  transfer 
of  that  certificate,  is  legally  good,  but  a  corporation 
would  object  to  make  a  transfer  under  a  power  which 
did  not  specifically  mention  the  particular  certificate, 
unless  it  was  absolutely  certain  from  its  terms  that 
this  certificate  in  question  was  included. 

LACK  OF  CAPACITY  TO  ASSIGN.— A  fourth 
case  is  lack  of  capacity  on  the  part  of  the  owner  of  the 
stock  to  make  a  transfer.  This  lack  of  capacity  may 
arise  from  a  variety  of  causes,  insanity  or  infancy, 
for  instance.  A  totally  insane  person  is  as  incapable 
of  transferring  stock  as  of  transferring  other  prop- 
erty. An  infant,  that  is,  a  minor,  though  not  wholly 
without  capacity,  if  not  under  guardianship,  becomes, 
presumably,  wholly  without  capacity  to  transfer  stock 
if  under  guardianship.  An  elderly  person  under  the 
charge  of  a  conservator  would  be  incapacitated  to 
transfer  his  property.  An  infant  who  has  had  no  guar- 
dian appointed,  though  he  could  make  a  transfer,  could 
also,  by  virtue  of  his  infant's  privilege,  revoke  that 
transfer,  which,  therefore,  would  be  too  insecure 
either  for  a  purchaser  to  take  or  for  a  corporation  to 
allow.  If  stock  is  owned  by  an  infant,  a  purchaser  or 
a  corporation  should  require  that  a  guardian  be  ap- 
pointed and  that  the  transfer  be  made  by  the  guar- 
dian. 

LACK  OF  DELIVERY— THEFT  OF  CER- 
TIFICATE.— A  fifth  case  is  where  the  signature  on 
the  back  of  the  certificate  of  stock  is  genuine,  but 


COMMERCIAL   LAW  245 

where  there  has  been  no  valid  delivery  by  the  owner. 
This  is  rather  a  troublesome  case  to  detect.  In  the 
case  of  full  negotiable  instruments,  like  bills  and 
notes,  if  the  signature  of  an  indorser  is  genuine,  a 
purchaser  for  value  of  the  instrument  will  get  title 
even  though  he  purchases  from  a  thief,  or  though  for 
any  reason  there  was  no  intention  on  the  part  of  the 
owner  who  wrote  his  name  on  the  back  to  make  a 
transfer  of  the  instrument.  But  by  the  common  law 
stock  certificates  were  not  negotiable  to  this  extent. 
This  case  occurred  in  a  law  office  in  Boston:  the 
head  of  the  firm  rather  carelessly  kept  "street  certifi- 
cates" for  stock  (that  is,  certificates  made  out  in  the 
name  of  the  brokerage  firm  which  was  the  former 
owner  and  indorsed  in  blank) ,  not  having  the  certifi- 
cates transferred  to  his  own  name.  The  stock  was 
not  at  the  time  dividend-paying,  so  that  a  transfer 
on  the  books  seemed  unimportant.  He  put  the  cer- 
tificates into  the  office  safe  to  which  the  office  boy  had 
access.  This  boy  took  the  certificates  and  sold  them 
through  a  broker,  and  the  loss  was  not  discovered  for 
several  years.  After  it  was  discovered  the  loss  was 
traced  by  the  numbers  of  the  certificates,  and  action 
was  brought  against  the  brokers  who  were  unfor- 
tunate enough  to  have  taken  the  stock  from  the  office 
clerk.  Now,  if  the  certificates  had  been  negotiable 
paper,  the  brokers  would  not  have  been  liable,  but 
under  the  law  then  existing  it  seemed  so  probable 
that  they  were  liable  that  they  settled  the  case  by  pay- 
ing more  than  half  the  value  of  the  stock.  The  only 
thing  that  could  have  prevented  their  being  liable  was 


246  COMMERCIAL    LAW 

that,  under  the  circumstances,  the  contention  was  pos- 
sible that  the  owner  of  the  stock  had  been  so  negli- 
gent in  his  dealing  with  the  certificates  as  to  preclude 
him  from  asserting  any  right.  Now  the  Transfer  of 
Stock  Act  changes  the  law  in  this  respect  so  far  as 
Massachusetts  stock  certificates  are  concerned.  The 
act  makes  them  fully  negotiable,  but  the  common  law 
would  apparently  still  apply  to  certificates  of  stock  of 
corporations  incorporated  in  other  States.  And  simi- 
lar principles  would  be  applicable  in  other  States 
which  have  passed  the  same  statute. 

DEATH  OF  OWNER  OF  INDORSED  CER- 
TIFICATE.— A  somewhat  similar  case  is  this:  sup- 
pose that  after  the  owner  of  stock  has  written  his 
name  on  the  back  of  it,  he  dies;  that  is  a  common 
enough  case.  Many  men  have  used  their  stock  cer- 
tificates to  borrow  money  on,  and  therefore,  after  pay- 
ing the  loan  they  have  them  in  their  possession  with 
their  signatures  on  the  back.  They  put  those  certifi- 
cates back  in  their  safe  deposit  boxes.  Then  sup- 
pose the  owner  dies  and  an  attempt  is  made  to  transfer 
the  stock  by  virtue  of  that  signature  written  on  the 
certificate.  That  is  not  a  valid  transfer  at  common 
law.  The  certificate  was  owned  only  up  to  the  time 
of  his  death  by  the  man  whose  name  is  on  the  face; 
on  his  death  his  executor  becomes  the  owner  and  the 
executor's  signature  is  necessary  to  transfer  the  title, 
and  the  signature  of  the  man  himself  written  before 
his  death  is  not  effective  for  that  purpose;  and  yet  a 
purchaser  may  not  be  aware  that  that  signature  is 
invalid ;  he  may  not  know  that  the  man  who  signed 


COMMERCIAL    LAW  247 

it  is  dead,  and  similarly  the  corporation  may  allow 
the  transfer  to  go  through  in  ignorance  that  the  signer 
is  dead.  If  the  money  which  is  the  proceeds  of  the 
stock  actually  reaches  the  executor  of  the  estate,  of 
course  he  could  not  object  to  the  validity  of  the  trans- 
fer, and  he  could  not  object  if  he  were  in  any  way  a 
party  to  the  transfer  of  the  stock  by  means  of  the 
signature  of  the  dead  man;  but  if  the  proceeds  did  not 
get  to  the  hands  of  the  executor  and  he  was  in  no  way 
responsible  for  the  transfer,  he  could  assert  that  the 
transfer  was  invalid  and  that  that  stock  belonged  to 
him.  This,  again,  is  changed  by  the  uniform  law  so 
far  as  applies  to  corporations  in  the  States  which  have 
enacted  that  law.  To  avoid  misapprehension  it  should 
be  said  that  if  an  indorsed  certificate  has  been  deliv- 
ered for  value  by  the  owner,  during  his  lifetime,  to  a 
purchaser  or  lender,  the  death  of  the  indorser  does  not 
impair  the  validity  of  the  signature  even  at  common 
law.  The  purchase  of  the  stock  or  a  loan  made 
on  the  stock  gives  the  purchaser  or  lender  a 
power  which  cannot  be  revoked  by  death  or  other- 
wise. 

BANKRUPTCY     OF     THE     OWNER     OF 

STOCK. — One  other  important  case,  in  which  a  gen- 
uine signature  of  one  who  was  the  owner  cannot 
transfer  a  good  title,  is  the  case  of  bankruptcy.  The 
Federal  bankruptcy  law  provides  absolutely  that  title 
to  property  which  a  bankrupt  has  at  the  time  of  his 
bankruptcy  shall  be  vested  in  his  trustee.  If,  there- 
fore, after  A's  bankruptcy,  A  seeks  to  transfer  stock 
which  he  had  owned,  and  which  was  in  his  own  name, 


248  COMMERCIAL   LAW 

he  cannot  do  so,  for  he  is  no  longer  the  owner  of  the 
stock,  and  he  has  no  power  to  transfer  it.  There- 
fore, even  a  bona  fide  purchaser  from  a  bankrupt  will 
get  nothing. 

ATTACHMENT  OF  STOCK.— A  sixth  difficul- 
ty in  regard  to  transfer  of  stock — -attachment  of  the 
stock  by  a  creditor  of  the  registered  owner — is  elimi- 
nated in  States  where  the  Uniform  Transfer  Act  has 
been  enacted.  Such  attachments  created  considerable 
difficulty  before  the  passage  of  the  act.  Suppose  this 
case :  A  is  the  owner  on  the  books  of  the  company  of 
100  shares  of  Boston  &  Albany  stock.  He  knows  a 
creditor  is  about  to  attach  that  stock,  and  in  order  to 
get  ahead  of  the  creditor  he  sells  the  stock  on  the  ex- 
change. If  he  makes  the  sale  before  the  attachment, 
undoubtedly  the  sale  everywhere  would  prevail  over 
the  subsequent  attachment;  but  suppose  the  attach- 
ment preceded  by  a  little  while  the  sale  of  the  stock. 
A  still  has  the  certificate,  and  brokers  and  purchasers 
are  accustomed  to  rely  on  the  certificate  as  evidence  of 
ownership.  They  take  the  certificate  and  pay  A 
money  for  it;  then  when  the  purchaser  goes  to  trans- 
fer the  stock  he  finds  that  an  attachment  has  been 
put  upon  the  books  of  the  company.  Where  the  uni- 
form law  governs  the  case  the  only  way  to  make  an 
attachment  of  stock  effective  is  to  seize  the  certifi- 
cate itself.  But  in  other  States  this  difficulty  may  still 
arise,  of  a  purchaser  being  deceived  by  the  certificate 
itself,  and  paying  money  on  the  faith  of  it  when  there 
has  been  an  attachment  levied  by  a  creditor  imme- 
diately before  on  the  books  of  the  company. 


COMMERCIAL    LAW  249 

TRANSFERS  BETWEEN  HUSBAND  AND 
WIFE. — One  other  matter  of  transfer  deserves  at- 
tention, and  that  is  a  transfer  between  husband  and 
wife,  or  wife  and  husband.  A  married  woman  can 
contract  in  most  States  as  fully  as  a  married  man,  but 
generally,  though  not  universally,  neither  of  them 
can  contract  with  the  other  or  make  a  conveyance  di- 
rectly to  the  other.  A  promissory  note  from  wife  to 
husband,  or  husband  to  wife,  or  any  other  conveyance 
or  transfer  or  contract  was  at  common  law  and  still 
is  in  many  States  invalid.  A  husband  can,  however, 
appoint  his  wife  his  agent,  and  a  wife  can  appoint  her 
husband  her  agent,  and  when  such  an  agent  acts,  his 
act  will  be  legally  that  of  the  principal,  just  as  in  any 
other  case  of  agency.  Accordingly,  if  a  husband 
draws  a  check  payable  to  his  wife,  though  he  does  not 
become  liable  as  drawer  to  his  wife,  and  could  not  be 
sued  by  her  if  the  check  was  not  paid,  the  bank  runs 
no  risk  in  paying  the  check  because  the  husband  has 
authorized  the  bank  to  make  a  pa3nnent  to  the  wife. 
Similarly,  if  a  husband  authorizes  a  corporation  to 
transfer  stock  to  his  wife  it  seems  that  the  corpora- 
tion is  protected,  having  acted  under  the  authority  of 
the  owner,  and  that  the  wife  would  get  a  good  title  to 
the  stock.  This  question  has,  however,  been  some- 
what disputed  by  lawyers.  Therefore  it  is  very  prob- 
able that  a  corporation  would,  as  a  matter  of  precau- 
tion, refuse  to  run  any  risk  by  transferring  directly 
from  husband  to  wife  or  vice  versa,  but  would  require 
that  the  transfer  should  be  made  through  a  third  per- 
son in  any  State  where  husband  and  wife  cannot  con- 


250  COMMERCIAL    LAW 

tract  with  one  another.  So  much  for  difficulties  aris- 
ing out  of  defects  caused  by  the  lack  of  legal  title  to 
the  stock. 

STOCK  HELD  IN  TRUST.— Now  let  us  con- 
sider equitable  defects.*  Such  defects  chiefly  arise 
where  stock  is  held  in  trust.  It  would  be  the  simplest 
and  pleasantest  thing  for  a  corporation  if  it  could  re- 
fuse to  register  stock  in  trust  at  all,  but  it  has  been 
decided  that  it  cannot  do  this,  that  it  is  bound,  if  re- 
quested, to  register  stock  in  favor  of  a  trustee  and 
issue  stock  to  trustees.  Now  trustees  hold  under  an 
appointment  by  the  court.  A  trustee  may  cease  to  be 
such  at  any  time  by  removal  of  the  court  as  well  as  by 
death.  Suppose  stock  in  the  name  of  D,  trustee.  If 
D  has  ceased  to  be  trustee  because  he  has  been  re- 
moved from  office,  a  transfer  by  him  will  not  be  valid. 
Accordingly,  it  is  essential  for  a  corporation  and  for 
a  purchaser  to  be  certain,  not  simply  that  D  was  trus- 
tee, but  that  D  is  trustee  at  the  time  he  attempts  to 
make  the  transfer.  We  may  suppose  the  case  of  a 
certificate  which  does  not  state  that  there  is  a  trust. 
Not  infrequently  trustees,  to  avoid  complications,  do 
not  specify  in  the  certificate  that  they  are  trustees. 
If  the  corporation  or  if  the  purchaser  of  that  stock 
has  no  notice  that  D  is  really  holding  that  stock  in 
trust,  the  corporation  or  the  purchaser  will  have  the 
same  rights  as  if  there  were  no  trust.  But  if  either 
the  corporation  or  the  purchaser  learns,  from  ex- 
trinsic sources,  that  the  stock  is  really  held  in  trust, 
they  will  be  bound  to  make  certain  that  the  seller  is 
still  empowered  to  act  as  trustee,  in  the  same  way  as 


COMMERCIAL    LAW  251 

if  the  certificate  specifically  stated  on  its  face  that 
the  stock  was  owned  by  D  in  the  capacity  of  trustee. 

ONE  HAVING  NOTICE  THAT  STOCK 
IS  HELD  IN  TRUST  MUST  ASCERTAIN  THE 
TERMS  OF  THE  TRUST.— Even  if  the  supposed 
trustee  is  actually  the  trustee  he  may  not  have  power 
to  give  a  good  title  to  the  stock.  He  has  the  legal 
title,  undoubtedly,  but  if  the  certificate  contains  notice 
that  he  holds  the  legal  title  as  trustee,  every  one  is 
bound  at  his  peril  when  purchasing  the  stock,  and  also 
the  corporation  is  bound  at  its  peril  before  it  allows 
the  transfer  of  the  stock,  to  make  sure  that  the  trus- 
tee is  authorized  by  the  terms  of  his  trust  to  transfer 
the  stock. 

A  TRUSTEE  HAS  POWERS  NECESSARY 
TO  CARRY  OUT  TERMS  OF  TRUST.— Generally 
when  a  transfer  of  stock  is  attempted  by  a  trustee  it 
means  that  the  trustee  is  selling  the  stock,  though  that 
is  not  necessarily  the  case.  A  trust  may  be  termi- 
nated ;  that  is,  a  trust  may  be  created  for  twenty  years, 
with  directions  to  the  trustee  to  transfer  the  trust 
property  at  the  end  of  twenty  years  to  certain  benefi- 
ciaries. A  transfer  by  the  trustee  at  the  close  of  the 
twenty  years  to  the  beneficiaries  would  not  be  a  sale 
of  the  stock ;  it  would  be  a  transfer  for  the  purpose  of 
carrying  out  the  trust,  and  a  trustee  always  has  im- 
plied power  to  make  any  transfer  of  stock  that  is 
necessary  to  carry  out  the  purpose  of  the  trust. 

A  TRUSTEE  HAS  NO  IMPLIED  POWER 
TO  SELL. — A  trustee  has  no  implied  power  to  sell. 
The  general  duty  of  a  trustee  is  to  keep  the  property 


252  COMMERCIAL   LAW 

which  is  left  to  him  in  trust  or  conveyed  to  him  in 
trust  in  its  existing  form,  and  no  power  is  implied  to 
change  the  form  to  something  else.  Accordingly,  if 
no  power  to  sell  is  in  terms  given  in  a  trust  created  by 
deed  or  will,  a  corporation  will  require,  and  a  pur- 
chaser should  require,  the  trustee  to  obtain  the  au- 
thority of  the  probate  court  to  make  the  sale.  Care- 
fully drawn  trusts  generally  contain  a  power  for  the 
trustee  to  sell  if  the  purpose  of  the  trust  is  to  produce 
an  income-bearing  fund  for  a  long  period  of  years. 
For  that  purpose  a  change  of  investment  is  frequently 
desirable,  and  therefore  trustees  are  expressly  given 
that  power.  But  the  corporation  which  has  issued  a 
certificate  to  a  trustee  and  a  purchaser  from  the  trus- 
tee must  find  out  at  their  peril  whether  such  a  power 
is  given. 

A  TRUSTEE  HAS  NO  IMPLIED  POWER 
TO  PLEDGE. — Another  power,  and  one  which  is  not 
commonly  given,  is  the  power  to  borrow  on  stock,  to 
pledge  it  or  use  it  for  collateral  security.  Such  a 
power  is  not  implied  and  is  not  commonly  given  in 
trust  deeds  or  wills.  Therefore,  a  bank  or  other  lender 
should  not  lend  on  certificates  of  stock  which  are 
made  out  to  the  borrower  as  trustee,  or  made  out  to 
any  one  as  trustee.  Of  course,  it  is  improper,  even 
though  the  trust  did  give  power  to  borrow,  to  allow 
the  trustee  not  only  to  borrow  money  on  trust  securi- 
ties but  to  use  the  money  borrowed  as  part  of  his  own 
assets;  that  is,  to  put  it  in  his  ov^oi  general  account. 
It  is  his  duty  to  keep  trust  money  separate,  and  there- 
fore if  the  trustee  has  power  to  borrow  he  should  keep 


COMMERCIAL    LAW  253 

the  funds  which  he  borrows  earmarked  as  trust  prop- 
erty; but  as  has  been  said,  he  will  rarely  have  power 
given  him  expressly  to  borrow  even  for  trust  purposes. 

A  TRUSTEE  CANNOT  TRANSFER  TO 
HIMSELF. — Suppose  a  trustee  is  by  a  deed  or  will 
given  power  to  sell  and  he  asks  the  corporation  to 
make  a  transfer  of  the  stock  to  himself.  The  corpora- 
tion should  not  do  it.  He  has  power  to  sell  to  any  one 
else  but  himself.  A  fiduciary  cannot  make  a  bargain 
with  himself  in  regard  to  his  trust  property,  and 
therefore  he  should  not  be  allowed  to  transfer  the 
stock  to  himself. 

A  TRUSTEE  CANNOT  DELEGATE  HIS 
POWER  TO  SELL.— A  trustee  cannot  delegate  his 
powers,  and  therefore  he  cannot  give  a  general  power 
of  attorney  to  another,  to  sell  trust  stock  or  any  trust 
property  whenever  it  may  seem  wise  to  the  agent  to 
do  so.  Even  though  the  trustee  has  himself  power  to 
sell,  he  must  exercise  his  own  discretion  as  to  the  oc- 
casion when  it  is  proper  to  sell. 

PURCHASER  FROM  A  TRUSTEE  IS  NOT 
BOUND  TO  SEE  TO  APPLICATION  OF  PUR- 
CHASE MONEY.— Though  the  corporation  and 
though  the  purchaser  from  a  trustee  are  bound  to  see, 
if  they  have  notice  of  the  trust  by  the  form  of  the  cer- 
tificate, that  the  trustee  is  not  making  an  unauthor- 
ized sale,  neither  the  purchaser  nor  the  corporation  is 
bound  to  see  that  the  trustee  does  not  make  an  im- 
proper application  of  the  money  received  from  sale  of 
trust  stock.  In  the  current  legal  phrase,  neither  the 
purchaser  nor  the  corporation  is  bound  to  see  to  the 


254  COMMERCIAL    LAW 

application  of  the  trust  money ;  but  if  either  the  pur- 
chaser or  the  corporation  had  notice  of  a  proposed 
misapplication  of  the  trust  money  to  be  received  for 
the  stock,  it  would  be  improper  to  allow  the  transfer 
knowing  that  the  proceeds  would  be  misapplied,  and 
the  corporation  or  the  purchaser  would  be  liable  if 
the  transfer  was  carried  out. 

AN  EXECUTOR  HAS  IMPLIED  POWER 
TO  SELL. — Stock  held  by  a  guardian  or  by  an  ex- 
ecutor is  in  many  respects  treated  similarly  to  stock 
held  by  a  trustee.  There  is  this  difference,  however, 
in  the  executor's  position,  that  as  it  is  his  duty  to  re- 
duce the  estate  to  cash  he  has  in  most,  but  not  all 
States,  an  implied  power  to  sell;  it  does  not  have  to  be 
given  to  him  in  the  will.  The  will,  however,  may  re- 
strict an  executor's  right  to  sell  certain  stock,  and 
therefore  even  in  the  case  of  an  executor  it  would  be 
proper  for  a  corporation  to  m.ake  sure  that  the  ex- 
ecutor's power  had  not  been  restricted  by  the  will 
before  allowing  the  transfer. 

TRANSFER  BY  AN  EXECUTOR  TO  A  LEG- 
ATEE.— Generally  the  executor  will  seek  to  reduce 
the  property  to  cash  and  therefore  seek  to  transfer 
the  stock  in  the  estate  to  a  purchaser,  but  he  may  try 
to  transfer  it  directly  to  a  legatee.  He  may  himself 
be  a  legatee  and  endeavor  to  transfer  to  himself.  Un- 
less he  is  a  residuary  legatee  or  a  legatee  of  the  specific 
stock  in  question  it  is  as  improper  for  him  to  transfer 
to  himself  as  for  a  trustee  to  transfer  to  himself.  Even 
though  the  executor  is  a  pecuniary  legatee  or  is  en- 
titled to  payment  for  commissions,  he  would  have  no 


COMMERCIAL    LAW  255 

right  to  take  stock  in  lieu  of  such  pecuniary  legacy  or 
commission,  for  he  cannot  make  such  a  bargain  with 
himself  though  he  might  in  regard  to  the  legacy  of 
another.  If  the  executor  is  a  specific  or  residuary  leg- 
atee the  question  of  a  right  to  transfer  to  himself  is 
the  same  as  to  transfer  to  any  other  legatee,  and  that 
right  is  only  subject  to  one  qualification.  Creditors 
of  an  estate  have  the  first  right;  legatees  do  not  get 
their  legacies  paid  unless  creditors  are  taken  care  of 
first.  Creditors  have  a  fixed  period  from  the  time 
when  executors  or  administrators  give  bonds  within 
which  to  assert  their  claims.  If  they  have  not  asserted 
their  claims  in  that  period  the  claims  are  barred. 
After  that  time  has  expired  it  is  generally  known 
whether  the  assets  of  the  estate  are  sufficient  to  pay 
legacies,  and  it  is  usually  then  proper  to  allow  a 
transfer  to  a  legatee.  Prior  to  that  you  run  the  risk — 
which  may  be  in  a  particular  case  a  very  small  one  or 
it  may  be  a  very  large  one — that  the  creditors  of  the 
estate  may  exhaust  the  assets  and  the  legatees  not  be 
entitled  to  anything. 

LOST  CERTIFICATES.  — •  Occasionally  a 
question  arises  in  regard  to  a  lost  certificate.  The 
Uniform  Law  provides  for'  this  case  in  substantially 
the  same  way  as  the  common  law  would  deal  with  it 
if  there  were  no  statute,  namely,  the  corporation  may 
demand  a  bond  to  indemnify  it  before  it  issues  a  new 
certificate.  This  bond  is  essential  because  should  the 
old  certificate  turn  up  and  be  transferred  to  a  bona 
fide  purchaser  for  value,  the  corporation  would  be 
liable  on  the  old  certificate,  and  as  it  would  also  be 


256  COMMERCIAL    LAW 

liable  to  a  purchaser  for  value  of  the  new  certificate  it 
is  necessary  that  it  should  have  a  bond  to  protect  it. 

INTERPLEADER  OF  SEVERAL  CLAIM- 
ANTS FOR  STOCK.— If  there  are  several  claimants 
for  stock,  as  sometimes  happens,  the  corporation 
should  file  a  bill  of  interpleader,  as  it  is  called,  against 
the  several  claimants,  asking  the  court  to  determine 
which  one  is  rightfully  entitled.  An  instance  of  that 
kind  would  be  where  A  asks  a  corporation  to  transfer 
stock  to  him,  presenting  a  certificate  indorsed  by  B, 
but  B  notifies  the  corporation  that  he  has  been  de- 
frauded out  of  that  stock  by  A,  and  that  he  elects  to 
rescind  the  transfer  to  A  and  demands  the  certificate 
back.  The  corporation  cannot  undertake  to  deter- 
mine which  of  these  parties  is  in  the  right ;  it  must  ask 
the  court  to  do  so.  Not  infrequently  the  same  situa- 
tion arises  in  a  bank  where  money  has  been  lent  on 
stock,  and  notice  is  given  to  the  bank  not  to  return 
that  security  to  the  borrower  because  he  obtained  it 
fraudulently  or  otherwise  has  acted  in  violation  of  the 
rights  of  a  third  person  in  pledging  it  to  the  bank. 
The  bank,  if  it  is  a  bona  fide  lender,  is,  of  course,  en- 
titled to  hold  the  stock  for  its  own  security  so  far  as 
it  may  be  necessary  to  repay  the  loan;  but  perhaps  the 
bank  can  get  the  loan  repaid  out  of  other  securities  un- 
questionably belonging  to  the  borrower.  In  that 
event  the  bank  should  do  so  and  then  ask  the  court 
who  is  entitled  to  the  disputed  stock. 

EFFECT  OF)  DELIVERING  UNINDORSED 
CERTIFICATE. — In  order  to  transfer  stock,  as  pre- 
viously said,  it  is  necessary  that  the  stock  should  be 


COMMERCIAL    LAW  257 

either  indorsed  or  that  on  a  separate  paper  an  assign- 
ment or  power  to  transfer  should  be  written.  What 
is  the  effect  of  giving  a  certificate  without  either  of 
these  formalities?  It  virtually  protects  the  person 
who  receives  the  certificate,  for  though  he  has  not 
title  to  the  stock  and  cannot  get  title  without  an  in- 
dorsement, he  has  the  certificate  in  his  possession 
which  prevents  any  other  person  from  getting  title; 
and,  furthermore,  he  has  the  right  to  require  an  in- 
dorsement from  the  person  whose  indorsement  is 
needed,  provided,  of  course,  that  the  holder  of  the  cer- 
tificate took  it  from  the  owner,  who  impliedly  or  ex- 
pressly agreed  that  he  should  have  title.  If  somebody 
not  an  owner  of  a  certificate  delivered  it  without  in- 
dorsement to  a  bank,  and  borrowed  money  on  it,  the 
bank  would  not  be  protected.  The  true  owner  could 
say,  "That  is  mine,"  and  take  it  away. 


CHAPTER  VIII 


PROPERTY  DEFINED.— Property  in  the  strict 
legal  sense,  is  the  aggregate  of  rights  which  one 
may  lawfully  exercise  over  particular  things  to 
the  exclusion  of  others.  "If  a  man  were  alone  in  the 
world,"  says  Kant,  "he  could  properly  hold  or  acquire 
nothing  as  his  own;  because  between  himself,  as  Per- 
son, and  all  other  outward  objects,  as  Things,  there 
is  no  relation.  The  relation  is  between  him  and  other 
people,  whom  he  excludes  from  the  thing."  All  things 
are  not  the  subject  of  property,  because,  the  sea, 
the  air,  light,  and  similar  things,  cannot  be  appro- 
priated. 

ILLUSTRATION.— An  illustration  that  gives 
us  the  idea  of  property  will  make  our  definition  clear. 
A  takes  his  shoes  to  a  cobbler  to  be  repaired.  When 
he  calls  for  them,  he  does  not  have  the  price  for  the 
work,  and  the  cobbler  refuses  to  give  them  up.  Both 
A  and  the  cobbler  have  a  property  right  in  the  shoes. 
The  right  to  absolute  ownership  is  in  A,  that  is  his 
property  right.  The  temporary  possession,  however, 
is  in  the  cobbler,  and  he  may  hold  the  shoes  under  the 
lien  for  repairs  indefinitely  and  until  he  receives  his 
compensation.  The  lien  is  his  property  right.  When 
we  use  the  term  property  in  its  lowest  form  we  mean 
by  it  the  right  of  possession.  In  our  illustration,  the 
cobbler's  lien  gives  him  the  right  of  possession.  When 
we  use  the  term  in  its  highest  form,  we  mean  the  right 

258 


COMMERCIAL    LAW  259 

of  exclusive  ownership;  in  our  illustration,  A's  shoes 
after  he  has  paid  the  repair  bill  and  secured  the  sl\oes 
again. 

THE  RIGHTS  OF  OWNERSHIP.— Exchi5;ive 
ownership  implies : 

1.  The  right  of  exclusive  possession  for  an  inde- 
terminate time. 

2.  The  right  of  exclusive  enjoyment  for  an  inde- 
terminate time. 

3.  The  right  of  disposition. 

4.  The  right  of  recovery  if  the  thing  be  wrong- 
fully taken  or  withheld. 

But,  you  say,  this  is  not  the  idea  one  ordinarily 
has  of  the  term  "property."  One  speaks  thus  of  his 
watch :  "I  own  this  watch.  It  is  my  property."  The 
answer  is,  property  is  a  term  with  a  double  meaning. 
In  the  ordinary  sense  "property"  indicates  the  thing 
itself,  rather  than  the  rights  attached  to  it.  There- 
fore it  is  that  we  have  a  law  of  personal  property,  and 
a  law  of  real  property. 

PERSONAL  PROPERTY  AND  REAL  PROP- 
ERTY DISTINGUISHED.— Real  property  has  been 
defined  to  be  co-extensive  v/ith  lands,  tenem.ents,  and 
hereditaments ;  to  put  it  more  simply,  we  may  say  that 
it  consists  of  land  and  anything  that  is  permanently 
affixed  to  the  land.  Personal  property  embraces  all 
objects  which  are  capable  of  ownership  except  land. 
One  fundamental  difference  between  the  two  is  that 
real  property  is  generally  considered  to  be  immovable, 
while  such  property  as  is  movable  is  usually  termed 
personal  property.    It  is  important  that  the  distinc- 


260  COMMERCIAL   LAW 

tion  between  the  two  forms  of  property  be  kept  in 
mind  because  different  results  follow  where  the  prop- 
erty is  held  to  be  one  or  the  other.  For  example,  on 
the  death  of  the  owner  of  real  property,  it  passes  to 
his  heir  or  devisee,  while  in  the  case  of  personal  prop- 
erty, it  goes  to  the  personal  representative,  the  execu- 
tor or  the  administrator,  and  through  him  to  the  lega- 
tee or  distributee.  Again,  in  settling  the  estate  of  the 
deceased  person,  personal  property  is  always  to  be 
used  first  to  pay  the  decedent's  debts.  The  modes  of 
transferring  personal  property  and  real  property  dif- 
fer. Real  property  is  transferred  by  deed.  Personal 
property  may  be  transferred  without  any  writing  and 
even  in  the  case  of  a  transfer  of  personal  property,  by 
a  bill  of  sale,  the  requirements  for  recording  it  are 
generally  quite  different  from  those  relating  to  the 
recording  of  deeds.  Again,  the  transfer  of  real  prop- 
erty is  governed  by  the  law  of  the  place  where  the  real 
property  is  situated,  whereas  the  transfer  of  personal 
property  is  governed  by  the  law  of  the  domicile  of  the 
owner.  Taxation  is  another  subject  where  the  distinc- 
tion is  most  important. 

SALES  OF  PERSONAL  PROPERTY.— The 
most  important  branch  of  the  law  of  personal  prop- 
erty, in  the  field  of  commercial  law,  is  that  relating  to 
the  sale  of  personal  property.  We  shall  confine  the 
balance  of  this  chapter  to  a  consideration  of  that  sub- 
ject. As  we  have  a  uniform  Negotiable  Instruments 
Law,  so  we  also  have  a  Uniform  Sales  Act  which  has 
now  been  adopted  in  many  of  the  States.  The  Sales 
Act  defines  a  sale  and  a  contract  to  sell  as  follows: 


COMMERCIAL    LAW  261 

(1)  A  contract  to  sell  goods  is  a  contract  whereby  the 
seller  agrees  to  transfer  the  property  in  goods  to  the 
buyer  for  a  consideration  called  the  price.  (2)  A  sale 
of  goods  is  an  agreement  whereby  the  seller  transfers 
the  property  in  goods  to  the  buyer  for  a  consideration 
called  the  price.  (3)  A  contract  to  sell  or  a  sale  may 
be  absolute  or  conditional.  (4)  There  may  be  a  con- 
tract to  sell  or  a  sale  between  one  part  owner  and 
another. 

SALES  AND  CONTRACTS  TO  SELL.— Sales 
are  to  be  distinguished  from  contracts  to  sell.  A  sale 
is  an  actual  transfer  of  property,  whereas  a  contract 
to  sell  is  an  agreement  to  make  a  sale  in  the  future. 
Sales  at  a  shop,  for  instance,  are  made  without  any 
contract  to  sell,  but  orders  for  goods  at  a  distance, 
and  agreements  to  ship  them,  frequently  precede  the 
actual  sale  of  the  goods,  which  is  made  in  pursuance 
of  the  prior  contract  to  sell.  The  sale  of  personal 
property  is  subject  to  different  rules  from  the  sale  of 
real  estate.  In  the  transfer  of  real  estate,  formalities 
of  deed  and  seal  are  necessary,  which  are  not  required 
in  personal  property,  and  the  subjects  must  be  con- 
sidered separately. 

A  SALE  DISTINGUISHED  FROM  SIMILAR 
TRANSACTIONS.— At  the  outset,  a  sale  must  be 
distinguished  from  several  other  similar  transactions. 
The  law  of  sales  is  a  branch  of  contract  law,  hence 
consideration  is  necessary  in  a  sale.  A  gift,  on  the 
other  hand,  which  may  result  in  the  transfer  of  per- 
sonal property  in  practically  the  same  manner  as  a 
sale,  does  not  require  any  consideration.    Hence,  an 


262  COMMERCIAL    LAW 

agreement  to  sell  goods  is  unenforceable  if  not  sup- 
ported by  consideration.  A  promise  to  make  a  gift  is 
always  unenforceable  because  the  very  idea  of  a  gift 
negatives  any  idea  of  consideration.  A  sale  and  a  bail- 
ment must  also  be  distinguished.  A  bailment  is  the 
rightful  holding  of  an  article  of  personal  property  by 
one,  for  the  accomplishment  of  a  certain  purpose,  with 
an  obligation  to  return  it  after  the  completion  of  that 
purpose.  Where  there  is  a  sale,  the  entire  property 
right  passes  to  the  nev/  buyer,  and  if  the  article  is 
destroyed,  providing  title  has  passed,  the  new  buyer 
must  pay  the  purchase  price  if  he  has  not  already  done 
so,  although  he  gets  nothing  for  it.  In  a  bailment, 
the  title  does  not  pass.  The  case  of  the  cobbler  repair- 
ing the  shoes  is  an  illustration  of  a  bailment.  If,  while 
the  shoes  are  in  his  possession,  his  shop  is  burned, 
through  no  fault  of  his,  the  owner  of  the  shoes  would 
stand  the  loss.  If  I  borrow  a  person's  automobile,  and 
while  using  it  the  car  is  struck  by  lightning  and  totally 
destroyed,  the  loss  falls  on  the  owner  because  this  also 
is  a  bailment.  On  the  other  hand,  had  I  bought  the 
car  and  temporarily  kept  it  in  the  seller's  garage, 
awaiting  the  completion  of  my  own  garage,  and  it  is 
burned  while  in  his  garage,  the  loss  is  mine.  By  such  a 
transaction,  I  become  the  owner  when  the  sale  is  made, 
and  the  former  ovv^ner  becomes  the  bailee. 

FORMALITIES  NECESSARY  FOR  THE 
COMPLETION  OF  A  SALE.— The  Sales  Act  pro- 
vides in  section  3,  subject  to  a  few  provisions,  that  "a 
contract  to  sell  or  a  sale  may  be  made  in  writing 
(either  with  or  without  seal),  or  by  word  of  mouth, 


COMMERCIAL    LAW  263 

or  partly  in  writing  and  partly  by  word  of  mouth, 
or  may  be  inferred  from  the  conduct  of  the  parties." 
The  main  qualification  of  the  right  to  make  an  oral 
sale  or  contract  to  sell  is  found  in  the  next  section 
(Section  4)  which  is  virtually  a  copy  of  a  similar  pro- 
vision in  the  English  Statute  of  Frauds  in  regard  to 
the  sale  of  personal  property.  Section  4  reads  as  fol- 
lows: 

"(1)  A  contract  to  sell  or  a  sale  of  any  goods  or 
choses  in  action  of  the  value  of  five  hundred  dollars  or 
upwards  shall  not  be  enforceable  by  action  unless  the 
buyer  shall  accept  part  of  the  goods  or  choses  in  action 
so  contracted  to  be  sold,  and  actually  receive  the  same, 
or  give  something  in  earnest  to  bind  the  contract,  or  in 
part  payment,  or  unless  some  note  or  memorandum  in 
writing  of  the  contract  or  sale  be  signed  by  the  party 
to  be  charged  or  his  agent  in  that  behalf. 

"(2)  The  provisions  of  this  section  apply  to  every 
such  contract  or  sale,  notwithstanding  that  the  goods 
may  be  intended  to  be  delivered  at  some  future  time 
or  may  not  at  the  time  of  such  contract  or  sale  be  ac- 
tually made,  procured,  or  provided,  or  fit  or  ready  for 
delivery,  or  some  act  may  be  requisite  for  the  making 
or  completing  thereof,  or  rendering  the  same  fit  for 
delivery;  but  if  the  goods  are  to  be  manufactured  by 
the  seller  especially  for  the  buyer  and  are  not  suitable 
for  sale  to  others  in  the  ordinary  course  of  the  seller's 
business,  the  provisions  of  this  section  shall  not 
apply. 

"(3)  There  is  an  acceptance  of  goods  within  the 
meaning  of  this  section  when  the  buyer,  either  before 


264  COMMERCIAL    LAW 

or  after  delivery  of  the  goods,  expresses  by  words  or 
conduct  his  assent  to  becoming  the  owner  of  those 
specific  goods." 

THE  CAPACITY  OF  PARTIES.— The  Sales 
Act  provides  in  section  2  that  "capacity  to  buy  and  sell 
is  regulated  by  the  general  law  concerning  capacity  to 
contract,  and  transfer  and  acquire  property.  Where 
necessaries  are  sold  and  delivered  to  an  infant,  or  to  a 
person  who  by  reason  of  mental  incapacity  or  drunk- 
enness is  incompetent  to  contract,  he  must  pay  a  rea- 
sonable price  therefor.  Necessaries  in  this  section 
mean  goods  suitable  to  the  condition  in  life  of  such 
infant  or  other  person,  and  to  his  actual  requirements 
at  the  time  of  delivery." 

IMPORTANCE  O  F  DISTINGUISHING 
SALE  AND  CONTRACT  TO  SELL.— Why  is  it  im- 
portant to  distinguish  between  a  contract  to  sell  and  a 
sale;  what  difference  does  it  make  whether  title  has 
passed  or  not?  The  primary  reason  that  it  makes  a 
difference  is  because  as  soon  as  the  title  has  been 
transferred  from  the  seller  to  the  buyer  the  seller  is 
entitled  to  the  price.  Prior  to  the  transfer  of  title, 
if  the  buyer  refused  to  take  the  goods,  the  seller  would 
be  entitled  only  to  damages,  which  would  be  the  dif- 
ference between  the  value  of  the  goods  which  the 
seller  still  retained  and  the  price  which  was  promised. 
If  the  goods  were  worth  as  much  or  more  than  the 
amount  of  the  price  promised,  the  seller  would  not  be 
entitled  to  any  substantial  damages.  But  after  title 
has  passed  the  buyer  must  pay  the  full  price,  and  the 
seller  may  recover  it  if  the  buyer  refuses  to  accept 


COMMERCIAL    LAW  265 

delivery.  Another  consequence  flowing  from  the 
transfer  of  title  is  that  the  goods  are  thereafter  at  the 
risk  of  the  buyer.  If  they  are  destroyed  by  accident 
the  buyer  must  nevertheless  pay  the  price,  for  the 
right  to  the  price  accrued  before  the  goods  were  de- 
stroyed, and  when  they  were  destroyed  they  were  at 
the  buyer's  risk.  Bankruptcy  is  another  circumstance 
which  makes  it  important  to  determine  who  holds  title 
to  the  goods.  If  the  buyer  becomes  bankrupt,  after 
title  to  the  goods  has  passed  to  him,  his  trustee  in 
bankruptcy  takes  the  goods  for  his  creditors,  but  if 
he  becomes  bankrupt  before  title  has  passed  that 
would  not  be  true.  The  bankruptcy  of  the  seller  would 
make  a  similar  difference. 

WHEN  TITLE  IS  PRESUMED  TO  PASS.— 
There  are  several  presumptions  in  the  law  as  to  when 
title  will  be  presumed  to  pass  if  there  was  no  specific 
agreement  between  the  parties  as  to  when  it  should 
pass.  If  they  simply  bargain  for  the  goods  without 
saying  anything  about  the  time  when  the  buyer  is  to 
become  the  owner,  the  first  presumption  is  that  title 
passes  as  soon  as  the  goods  are  specified  and  the  par- 
ties are  agreed  on  the  terms  of  the  bargain,  even 
though  no  part  of  the  price  has  been  paid  and  though 
the  goods  have  not  been  delivered.  It  is  often  as- 
sumed that  delivery  is  essential  to  transfer  title  to 
goods,  but  that  is  not  so,  though  delivery  is  strong 
evidence  of  intent  to  transfer  title.  If  the  parties  have 
made  their  bargain,  and  definitely  agreed  on  the  terms 
of  the  bargain,  title  passes  even  though  possession  of 
the  goods  still  remains  in  the  hands  of  the  seller.  The 


266  COMMERCIAL    LAW 

seller,  however,  has  a  lien  for  the  price  though  he  has 
parted  with  title.  As  long  as  the  goods  are  in  his 
possession  he  may  refuse  to  surrender  until  he  is  paid 
the  price,  unless  he  agreed  to  sell  on  credit. 

TITLE  PASSES  WHEN  PARTIES  AGREE. 
— It  is  only  a  presumption  that,  where  the  terms  of  a 
bargain  are  fixed  and  the  goods  are  specified,  title 
passes  at  once,  for  if  the  parties  agree  that  title  shall 
not  pass  at  once  it  will  pass  when  and  as  they  agree. 
Their  intention  in  regard  to  the  transfer  of  title  may 
not  be  stated  in  express  terms,  and  it  may  be  gathered 
only  from  the  acts  or  words  of  the  parties.  If  some- 
thing remains  to  be  done  to  the  goods  by  the  seller,  to 
put  them  in  a  deliverable  condition,  that  indicates  an 
intent  that  title  shall  not  pass  until  they  are  in  the  con- 
dition agreed  upon.  If  the  parties  provide  that  the 
goods  shall  be  stored  at  the  expense  of  the  seller,  for 
a  time  or  at  the  risk  of  the  seller,  that  indicates  title  is 
not  intended  to  pass,  for  if  they  are  at  the  seller's  ex- 
pense and  risk,  presumably  they  are  still  his  goods. 
On  the  other  hand,  delivery  of  the  goods  indicates  an 
intent  to  pass  title,  although  it  is  possible,  if  the  par- 
ties so  agree,  that  title  does  not  pass  even  though  the 
goods  are  delivered.  Again,  payment  of  the  price  is 
evidence  tending  to  show  an  intent  to  pass  title,  for 
buyers  do  not  ordinarily  pay  the  price  in  advance.  It 
is  not  uncommon  for  credit  to  be  given  by  the  seller, 
but  it  is  uncommon  for  the  buyer  to  pay  first ;  but  even 
that  is  not  impossible,  and  therefore,  though  payment 
of  the  price  is  evidence  of  an  intent  to  transfer  title 
immediately,  it  is  not  conclusive  evidence. 


COMMERCIAL    LAW  267 

TRANSFER  OF  TITLE  BY  SUBSEQUENT 
APPROPRIATION.— Suppose  title  does  not  pass 
immediately,  which  may  be  due  to  the  fact  that  the 
parties  so  agreed,  or  to  the  fact  that  the  goods  were 
not  specified  at  the  time  the  bargain  was  made.  That 
is  a  common  case.  A  and  B  contract  for  the  sale  of  100 
cases  of  shoes  to  be  made  by  A.  At  the  time  the  par- 
ties make  their  bargain  the  shoes  have  not  yet  been 
made,  but  the  parties  expect  that  they  will  be  made 
later,  and  appropriated  to  the  bargain,  as  the  legal 
phrase  is.  Or  title  may  not  pass  at  the  time  the  bar- 
gain is  made,  although  the  goods  are  specified.  The 
parties  may  have  expressly  agreed  that  title  should  not 
pass;  or  though  the  goods  are  specified,  something 
may  remain  to  be  done  to  them  by  the  seller  to  put 
them  in  a  deliverable  condition.  Now,  if  title  for  any 
of  these  reasons  does  not  pass  when  the  bargain  is 
made,  it  may  pass  by  an  express  agreement  of  the 
parties,  made  later,  that  the  buyer  shall  take  title  and 
that  the  seller  shall  give  title;  or  frequently  it  may 
pass  by  what  is  called  an  appropriation  of  the  goods 
by  the  seller  to  the  buyer,  without  any  express  later 
assent  of  the  buyer,  by  virtue  of  an  implied  assent  of 
the  buyer  given  in  the  original  agreement  that  the  sel- 
ler should  appropriate  the  goods.  What  is  meant  will 
be  understood  by  one  or  two  illustrations. 

APPROPRIATIONS  BY  DELIVERY  TO  A 
CARRIER. — Suppose  A  contracts  to  sell  and  ship  to 
the  buyer  100  cases  of  shoes,  and  B  contracts  to  re- 
ceive and  pay  for  them.  That  shipment  to  the  buyer 
is  an  appropriation  of  the  goods.    The  very  100  cases 


268  COMMERCIAL    LAW 

with  which  the  seller  intends  to  fulfill  the  bargain  are 
indicated  by  the  delivery  of  them  to  the  carrier,  and 
the  buyer,  since  he  agreed  in  the  first  place  that  they 
should  be  shipped,  has  assented  to  the  appropriation. 
Therefore,  in  such  a  case,  as  soon  as  the  goods  are 
delivered  to  the  carrier  the  presumption  is  that  title 
passes  to  the  buyer.  This  is  by  far  the  commonest 
case  of  appropriation  by  the  seller  in  accordance  with 
authority  given  by  the  buyer  in  his  original  agree- 
ment, and  it  is  so  common  that  it  deserves  a  little  fur- 
ther treatment. 

ILLUSTRATION.— This  kind  of  appropriation 
can  be  very  well  illustrated  by  the  case  of  a  supposed 
sale  of  tobacco  to  a  minor.  A,  a  minor,  lives  in 
an  outlying  suburb  of  Boston  where  the  sale  of 
tobacco  to  a  minor  is  not  permitted.  He  buys  goods 
of  S.  S.  Pierce  Company  in  Boston  and  wants  to  buy 
some  cigars  from  them.  He  can  buy  cigars  of  them  in 
Boston  and  send  them  out  to  his  home,  but  the  title 
must  pass  to  him  in  Boston.  If  the  title  passes  in  the 
suburb  it  is  an  illegal  sale  by  S.  S.  Pierce  Company, 
and  consequently  they  do  not  want  to  make  it.  Of 
course  the  buyer  can  go  and  get  the  goods  and  pay  for 
them  in  Boston  and  send  them  himself  to  his  resi- 
dence. But  suppose  he  sends  an  order  by  mail ;  if  S.  S. 
Pierce  Company  are  willing  to  charge  goods  to  him, 
giving  him  credit,  they  can  send  the  goods  by  express, 
because  on  their  shipment  of  the  goods  the  title  will 
pass  and  the  buyer  will  become  a  debtor  for  the  price 
of  the  goods  in  Boston;  but  they  must  not  send  the 
goods  by  their  own  wagon,  as  their  carrying  the 


COMMERCIAL    LAW  269 

goods  themselves  out  to  the  buyer's  residence  leaves 
them  in  their  possession  until  delivery,  and  the  de^ 
livery  does  not  take  place  until  the  goods  are  deliv- 
ered from  their  wagon  at  his  house.  That  would  not 
do.  Whereas  if  the  goods  are  delivered  to  a  public 
carrier  in  Boston  the  carrier  would  be  the  buyer's 
agent  and  title  would  pass  in  Boston. 

THE  SELLER  MUST  FOLLOW  EXACTLY 
AUTHORITY  GIVEN  HIM.— Suppose  the  buyer 
specified  that  the  goods  are  to  be  shipped  by  a  given 
route,  and  the  seller  shipped  them  by  a  different  route. 
Title  would  not  pass  then  because  the  buyer  had  not 
authorized  the  seller  to  appropriate  them  to  him,  the 
buyer,  in  that  way.  It  may  be  that  the  seller's  way  of 
sending  them  was  better  than  that  originally  assented 
to  by  the  buyer,  but  the  seller,  if  he  wishes  to  hold  the 
buyer,  as  owner  of  the  goods  from  the  time  of  ship- 
ment, must  get  his  approval  of  that  better  way.  Still 
more  important  than  the  method  of  shipment  is  the 
character  of  the  goods  themselves.  The  seller  cannot, 
by  putting  any  goods  on  the  train,  transfer  title.  He 
must  put  on  the  train  the  very  kind  of  goods  which  the 
buyer  agreed  to  receive,  and  that  will  mean  not  simply, 
in  the  case  supposed,  that  the  goods  must  be  shoes, 
but  they  must  be  merchantable  shoes  of  the  character 
and  sizes  which  the  buyer  agreed  to  take.  The  goods 
must  be  properly  packed  and  all  usual  precautions  in 
regard  to  them  taken.  In  so  far  as  the  original  agree- 
ment specified  what  was  to  be  done,  those  things  must 
be  done.  In  so  far  as  the  original  agreement  does  not 
specify  how  the  goods  are  to  be  shipped,  or  what  shall 


270  COMMERCIAL    LAW 

be  done  in  regard  to  them,  the  seller  has  discretion  to 
do  anything  which  is  customary  and  proper  for  a  care- 
ful business  man. 

SHIPMENT  OF  GOODS  C.  O.  D.— There  has 
been  considerable  litigation  in  regard  to  the  effect  of 
shipping  goods  C.  O.  D.  Suppose  goods  were  ordered 
and  goods  of  the  sort  ordered  were  shipped  in  accord- 
ance with  the  directions  in  the  order,  but  were  marked 
C.  O.  D.  Those  letters  mean,  as  you  know,  collect  on 
delivery,  and  two  possible  explanations  may  be  given 
of  their  effect.  One,  that  the  seller  retains  not  only 
control  of,  but  also  title  to,  the  goods  until  they  are 
delivered  and  the  price  paid.  According  to  that  view 
the  carrier  is  made  the  seller's  agent,  to  hold  the  title 
to  the  goods  and  transfer  it  to  the  buyer  when  he  pays 
for  the  goods.  But  the  better  view  is  that  the  carrier 
merely  retains  a  hold  on  the  goods,  a  lien  on  behalf  of 
the  seller,  while  title  to  the  goods  passes  on  shipment. 

EFFECT  OF  THE  FORM  OF  A  BILL  OF 
LADING. — One  cannot  speak  of  title  passing  or  being 
retained  on  shipment  of  goods  without  referring  to 
bills  of  lading,  for  the  general  rules  which  have  been 
given  must  be  qualified  by  this  statement,  that  by 
means  of  a  bill  of  lading  the  title  may  be  at  will  re- 
tained or  transferred  (if  the  buyer  has  authorized  a 
transfer).  The  proper  v/ay  to  indicate  a  transfer  of 
title  when  goods  are  shipped  is  to  have  the  buyer 
named  as  consignee  in  the  bill  of  lading.  A  bill  of 
lading  is  very  much  like  a  promissory  note ;  the  carrier 
promises  to  deliver  the  goods  to  somebody  who  is 
called  the  consignee,  and  who  corresponds  to  the 


COMMERCIAL    LAW  271 

payee  of  a  note.  There  is  this  further  feature  in  a  bill 
of  lading:  the  carrier  acknowledges  receipt  of  the 
goods  from  the  consignor,  that  is,  the  shipper,  and  the 
carrier  promises  to  deliver  them. 

ILLUSTRATIONS.— Now,  when  S.  S.  Pierce 
Company  decide  to  ship  goods  to  a  buyer,  it  may  con- 
sign them  to  the  buyer  or  it  may  consign  them  to 
itself ;  that  is,  the  same  person  may  be  consignor  and 
consignee.  That  is  very  common  in  business,  in  order 
that  the  shipper  may  retain  title  to  the  goods  until  he 
receives  payment.  He  takes  the  bill  of  lading  in  his 
own  name  and  then,  generally,  attaches  a  draft  on 
the  buyer  of  the  goods,  and  sends  the  bill  of  lading 
and  the  draft  together  through  a  bank.  The  bank 
notifies  the  drawee  of  the  draft,  who  is  the  man  who 
has  agreed  to  buy  the  goods,  that  the  bill  of  lading 
with  the  draft  are  at  the  bank,  and  that  the  buyer  may 
have  the  bill  of  lading  when  he  pays  the  draft.  The 
buyer  pays  the  draft  and  gets  the  bill  of  lading,  and 
then  for  the  first  time  does  he  become  the  owner  of 
the  goods.  On  the  other  hand,  if  the  shipper — S.  S. 
Pierce  Company — had  consigned  the  goods  directly 
to  the  buyer,  the  buyer  would  have  become  the  owner 
of  the  goods  on  shipment,  provided  the  buyer  had 
authorized  that  shipment.  The  seller  cannot,  how- 
ever, by  naming  a  buyer  consignee,  make  the  buyer 
owner  of  any  goods  which  he  has  not  agreed  to  re- 
ceive. So  much  for  appropriation  of  the  goods  to  the 
buyer  by  shipment.  In  another  chapter  fuller  refer- 
ence will  be  made  to  bills  of  lading  as  documents  of 
title  and  as  bank  securities.    In  this  connection  they 


272  COMMERCIAL   LAW 

are  referred  to  merely  as  indicating  an  intention  to 
transfer  or  retain  title  as  between  buyer  and  seller. 

IMPORTANCE  OF  DELIVERY  IN  SALES 
OF  GOODS.— Title  to  chattel  property,  it  has  been 
said,  may  pass  without  delivery.  This  is  true  as  be- 
tween the  parties,  but  as  against  creditors  and  third 
persons  delivery  is  necessary.  Suppose  A  sells  a  horse 
to  B  and  does  not  deliver  the  horse,  and  A  afterwards 
sells  the  horse  to  C  and  does  deliver  the  horse  to  C. 
B  comes  around  to  C  and  says,  "That  is  my  horse.  I 
paid  A  the  full  price."  C  may  say,  "I  bought  him  in 
good  faith.  I  thought  it  was  A's  horse.  I  have  got 
him  and  I  am  going  to  keep  him."    C  may  keep  him. 

PLACE  OF  DELIVERY.— Certain  contractual 
rights  between  the  buyer  and  seller  are  implied  from 
the  nature  of  the  bargain  of  sale.  A  seller  is  under  an 
implied  obligation  not  only  to  transfer  title  to  the 
buyer,  but  to  deliver  possession  to  him.  Where  must 
the  seller  deliver  possession?  If  the  contract  states 
the  place,  the  terms  of  the  contract  decide  that  ques- 
tion. If  the  contract  does  not  expressly  state  where 
the  place  is  to  be,  the  place  of  the  seller's  residence  is 
the  place  where  the  seller  is  bound  to  deliver,  unless 
the  goods  are  too  heavy  for  easy  transportation,  and 
in  that  case  the  place  of  delivery  is  the  place  where 
the  goods  are  at  the  time  of  the  bargain.  That  may  be 
the  seller's  place  of  business,  and  it  may  not. 

DELIVERY  AND  PAYMENT  ARE  CON- 
CURRENT CONDITIONS.  —  Concurrently  with 
the  seller's  duty  to  deliver  possession,  the  buyer  is 
under  a  duty  to  pay  the  price,  unless  the  contract  pro- 


COMMERCIAL    LAW  273 

vides  for  a  period  of  credit.  The  delivery  and  the  pay- 
ment of  the  price  are,  in  the  absence  of  contrary 
agreement,  concurrent  conditions.  The  seller  must 
offer  to  deliver  if  he  wants  to  get  a  right  of  action  for 
the  price,  and  the  buyer  must  tender  payment  if  he 
wants  a  right  of  action  for  the  goods.  The  tender  of 
price  and  delivery  must  be  at  the  place  where  pay- 
ment and  delivery  is  due.  It  may  be  asked,  how  is  the 
seller  to  tender  the  goods  at  the  place  delivery  is  due 
if  that  is  the  seller's  place  of  business  and  the  buyer 
does  not  appear?  The  answer  is,  that  it  is  in  effect  a 
tender  for  the  seller  to  have  the  goods  in  the  place 
where  they  are  to  be  delivered,  he  being  ready  and 
willing  to  deliver  them.  If  the  buyer  does  not  come 
there  the  buyer  must,  nevertheless,  pay  the  seller.  By 
the  seller's  readiness  to  perform,  at  the  place  where 
performance  is  due,  and  deliver,  if  the  buyer  with  his 
money  is  at  the  place  where  payment  is  due,  there  is 
in  effect  a  tender. 

RIGHT  OF  INSPECTION.— The  buyer  and 
seller  have  certain  other  implied  rights  and  duties.  A 
right  which  the  buyer  always  has,  in  the  absence  of 
agreement  to  the  contrary,  is  a  right  to  inspect  the 
goods,  to  see  that  he  is  getting  what  he  bargained  for, 
before  he  accepts  title  and  pays  the  price.  He  may, 
however,  waive  this  right  of  inspection ;  he  may  agree 
to  pay  the  price  without  seeing  what  he  is  getting, 
and  in  modern  business  this  is  not  uncommon.  One 
sort  of  bargain  frequently  made  contains  this  term: 
"Cash  against  bill  of  lading."  That  means  the  buyer 
is  to  pay  the  price  of  the  goods  on  receiving  the  bill  of 


274  COMMERCIAL    LAW 

lading.  The  bill  of  lading  will  usually  reach  him  be- 
fore the  goods,  and,  therefore,  before  he  has  a  chance 
to  inspect;  and  by  the  terms  of  his  bargain  he  has 
agreed  to  pay  cash  against  the  bill  of  lading  and  he 
must  do  so.  Of  course,  if  the  goods  when  received 
turn  out  not  to  be  what  he  bargained  for,  he  has  a 
right  to  sue  for  breach  of  contract  or  recovery  of  the 
price  paid.  But  in  the  first  place,  when  the  bill  of 
lading  comes  he  has  to  assume  that  the  goods  are 
going  to  be  right  and  pay  for  the  bill  of  lading.  An- 
other case  where  a  right  of  inspection  is  waived  is 
where  goods  are  sent  C.  O.  D.  You  order  goods  to  be 
sent  in  that  v/ay  and  the  expressman  brings  them. 
You  say  you  want  to  open  the  package  and  see  if  the 
goods  are  right.  You  will  find  the  expressman  will 
not  let  you.  He  will  say,  "No,  you  must  pay  for  the 
sealed  package,"  and  until  you  do  so,  you  will  have  no 
right  to  the  possession  of  the  goods.  If  the  goods  are 
not  all  right  you  have  redress  by  suing  the  seller,  but 
you  must  pay  your  money  first. 

WARRANTIES. — Another  and  most  important 
right  which  the  buyer  has  is  the  enforcement  of  war- 
ranties. Warranties  of  a  chattel  may  be  either  express 
or  implied.  An  express  warranty  is  a  promise  or  an 
obligation  imposed  by  the  law  because  of  a  repre- 
sentation which  the  seller  has  made  in  regard  to  the 
goods.  The  simplest  form  of  v/arranty  is  where  the 
seller  says,  "I  warrant  this  horse  is  sound,"  or,  "I 
warrant  this  piano  v/ill  stay  in  tune  for  a  year."  These 
warranties  are  promises  and  are  subject  to  the  same 
rules  as  other  promises.    They  are  contracts  for  con- 


COMMERCIAL    LAW  275 

sideration,  the  consideration  for  the  promise  being  in 
each  case  the  purchase  of  the  goods.  But  we  have 
warranties  which  are  not  based  on  promises,  strictly 
so  called,  and  yet  are  express.  A  tries  to  sell  a  horse. 
He  says  the  horse  is  perfectly  sound,  four  years  old, 
broken  to  harness,  and  has  trotted  a  mile  in  three 
minutes.  Those  are  in  form  representations  rather 
than  promises;  they  are  assertions  of  fact,  and  when 
A  makes  them  it  is  possible  he  does  not  understand 
that  he  is  binding  himself  for  the  truth  of  his  state- 
ments; and  yet  if  they  are  made  as  positive  state- 
ments of  fact,  the  seller  is  held  to  warrant  the  truth 
of  those  statements. 

REPRESENTATIONS  OF  FACT  AND  OF 
OPINION. — The  great  distinction,  between  warran- 
ties by  representation  and  statements  in  regard  to 
property  which  do  not  amount  to  express  warranties, 
is  that  between  statements  of  opinion  and  statements 
of  positive  fact.  If  the  buyer  said,  "I  believe  the  horse 
can  trot  a  mile  in  three  minutes  any  day,"  it  is  not  a 
warranty;  even  the  statement,  "The  horse  can  trot  a 
mile  in  three  minutes"  would  probably  not  be  a  war- 
ranty ;  but  the  statement,  "The  horse  has  trotted  a  mile 
in  three  minutes,"  is  a  direct  assertion  of  fact,  and  the 
element  of  opinion  does  not  occur,  and  therefore 
that  would  be  a  warranty.  Statements  of  value  do 
not  amount  to  warranties.  Those  are  necessarily  to 
some  extent  matters  of  opinion.  General  statements 
of  good  quality  do  not,  ordinarily,  amount  to  warran- 
ties. The  courts,  however,  are  getting  stiffer  and 
stiffer  in  regard  to  these  matters.    It  used  to  be  the 


276  COMMERCIAL    LAW 

law  that  a  seller  could  represent  nearly  anything  he 
chose  in  regard  to  his  goods,  and  not  be  bound,  so  long 
as  he  did  not  expressly  say,  "I  warrant,"  or  make  a 
promise  in  terms  in  regard  to  them.  That  was  called 
the  rule  of  "caveat  emptor" — "let  the  buyer  beware" 
— but  this  rule  is  almost  wiped  out  so  far  as  repre- 
sentations of  fact  are  concerned.  Now,  the  seller  had 
better  beware  of  what  he  says,  for  he  may  find  himself 
liable  as  a  warrantor. 

NO  WARRANTIES  IMPLIED  IN  SALES  OF 
REAL  ESTATE. — There  are  certain  warranties  im- 
plied, although  the  buyer  does  not  bargain  for  them 
and  although  the  seller  makes  no  express  representa- 
tions regarding  them.  In  this  respect  sales  of  personal 
property  differ  entirely  from  sales  of  real  estate.  In 
the  case  of  real  estate  you  get  no  warranty  but  what 
you  bargain  for.  If  you  get  a  deed  without  words  of 
warranty,  and  it  turns  out  that  the  seller  had  no  title, 
in  the  absence  of  fraud  you  have  no  redress;  you  can- 
not get  your  money  back  though  you  have  no  title  to 
the  land. 

WARRANTY  OF  TITLE  IMPLIED  IN 
SALES  OF  PERSONAL  PROPERTY.  — In  the 
case  of  personal  property  it  is  otherwise.  The  first 
implied  warranty  that  exists  in  the  case  of  a  sale  of 
personalty,  unless  the  contrary  is  expressly  agreed, 
is  the  implied  warranty  of  title.  The  seller  impliedly 
warrants  that  he  has  title  to  the  property  and  will 
transfer  title  to  the  buyer.  The  only  exception  to  this 
is  where  a  sale  is  made  by  a  person  in  a  representative 
capacity,  as  by  a  sheriff  or  an  agent.  In  that  case  the 


COMMERCIAL   LAW  277 

person  making  the  sale  does  not  impliedly  warrant 
title.  In  the  case  of  an  agent,  however,  if  the  agent 
was  authorized  to  make  the  sale,  the  principal  would 
be  liable  as  an  implied  warrantor  of  title;  and  if  the 
agent  was  not  authorized  to  make  the  sale,  the  agent 
would  be  liable  as  warranting  his  authority — not  as 
warranting  title  to  the  goods,  but  warranting  that  he 
had  a  right  to  bind  his  principal.  Even  in  the  case  of 
a  sale  by  an  agent,  therefore,  the  purchaser  gets  sub- 
stantial redress  if  the  title  turns  out  to  be  defective. 
It  is  possible,  of  course,  by  express  agreement,  for  a 
buyer  to  buy  and  a  seller  to  sell  merely  such  title  as 
the  seller  may  have;  but  there  must  be  an  express 
agreement,  or  very  special  circumstances,  indicating 
that  such  was  the  intention  of  the  parties,  in  order  to 
induce  a  court  to  give  this  construction  to  a  bargain. 
IMPLIED  WARRANTY  OF  QUALITY  IN 
SALES  BY  DESCRIPTION.— Not  only  are  there 
implied  warranties  of  title,  but  there  are  also  implied 
warranties  in  regard  to  the  quality  of  goods.  The  fun- 
damental principle  at  the  bottom  of  implied  warranty 
of  quality  of  goods  is  this :  if  the  buyer  justifiably  re- 
lies on  the  seller's  skill  or  judgment  to  select  proper 
goods,  then  the  seller  is  liable  if  he  does  not  deliver 
proper  goods.  We  may  distinguish  in  regard  to  im- 
plied warranties  of  quality,  sales  of  specific  goods — 
that  is,  sales  of  a  particular  thing — and  sales  of  goods 
by  description.  In  the  case  of  sales  by  description 
there  is  always  an  implied  warranty  that  the  buyer 
shall  have  not  only  goods  which  answer  that  descrip- 
tion, but  merchantable  goods  which  answer  that  de- 


278  COMMERCIAL   LAW 

scription.  Suppose  a  seller  contracts  to  sell  so  many 
hogsheads  of  Manila  sugar.  The  law  formerly  was 
that  the  seller  could  tender  to  the  buyer,  in  fulfillment 
of  that  contract,  the  worst  article  that  he  could  find 
which  bore  the  name  of  Manila  sugar.  The  law  at 
present  is  that  the  seller  must  furnish  to  the  buyer 
merchantable  Manila  sugar;  that  is,  Manila  sugar  of 
average  and  salable  quality.  It  does  not  have  to  be 
the  best,  but  it  must  be  ordinarily  salable  as  mer- 
chantable Manila  sugar. 

IMPLIED  WARRANTY  IN  SALES  OF 
SPECIFIED  GOODS.— Contrast  with  that  case  a 
contract  to  sell  a  specific  identified  lot  of  Manila  sugar 
before  the  buyer  and  seller.  Is  the  buyer  bound  to 
take  without  objection  that  specific  lot,  whether  or 
not  it  turns  out  to  be  merchantable?  Or  suppose  you 
go  to  a  shop  where  they  sell  bicycles  and  buy  a  bicycle ; 
you  pick  out  a  specific  bicycle,  and  it  turns  out  that, 
owing  to  defects  in  manufacture,  it  is  not  good  for 
anything.  It  breaks  down  the  first  time  you  ride  it. 
May  the  seller  say,  "You  looked  at  what  we  had  in 
stock  and  this  is  the  machine  you  agreed  to  buy"?  It 
is  in  this  class  of  cases  that  the  question  of  justifiable 
reliance  by  the  buyer  on  the  seller's  skill  and  judg- 
ment becomes  important,  and  in  determining  whether 
the  buyer  justifiably  relied  on  the  seller's  skill  and 
judgment  several  things  must  be  considered. 

INSPECTION  AS  AFFECTING  IMPLIED 
WARRANTY. — Was  the  defect  open  to  inspection 
and  was  there  opportunity  to  inspect  the  goods?  If 
there  was,  there  is  less  reason  to  suppose  that  the 


COMMERCIAL    LAW  279 

buyer  was  relying  on  the  seller's  skill  and  judgment 
than  if  the  defect  was  latent  and  not  open  to  inspec- 
tion. 

IMPLIED  WARRANTY  WHERE  THE 
SELLER  IS  A  MANUFACTURER.— What  was 
the  nature  of  the  seller's  business?  Was  he  a  manu- 
facturer of  the  goods  in  question?  The  strictest  rules 
of  implied  warranty  of  quality  are  applied  against 
manufacturers,  and  this  is,  you  will  see,  reasonable, 
because  the  manufacturer  ought  to  know  about  the 
goods  and  the  buyer  naturally  relies  on  the  manufac- 
turer, as  knowing  about  the  character  of  the  goods,  to 
give  goods  of  proper  quality.  Therefore,  unless  the 
buyer  pretty  clearly  assumes  the  risk  himself  of  pick- 
ing out  what  is  satisfactory  to  himself,  a  seller  who  is 
a  manufacturer  will  be  held  to  warrant  the  merchant- 
able quality  of  the  goods  which  he  makes  and  sells. 

IMPLIED  V/ARRANTY  WHERE  THE 
SELLER  IS  A  DEALER.— The  next  grade  below  a 
manufacturer  is  a  dealer  in  that  sort  of  goods.  He 
cannot  have  the  same  knowledge  as  a  manufacturer, 
but  still,  a  dealer  in  goods  of  a  particular  kind  is  much 
more  competent  to  judge  of  their  quality  than  an  or- 
dinary buyer  and  therefore  a  dealer  also,  unless  there 
is  special  reason  to  suppose  the  buyer  did  not  rely  on 
his  ow^n  judgment,  will  be  held  to  warrant  that  the 
goods  are  merchantable. 

IMPLIED  WARRANTY  OF  FITNESS  FOR 
A  PARTICULAR  PURPOSE.— Sometimes  there  is 
a  warranty  of  still  greater  scope  than  a  warranty  of 
merchantability;  that  is,  a  warranty  of  fitness  for  a 


280  COMMERCIAL    LAW 

particular  purpose.  A  buyer  agrees  to  buy  glue  of  a 
manufacturer.  The  buyer  is,  as  the  glue  manufacturer 
knows,  a  furniture  manufacturer.  The  glue  manu- 
facturer sells  the  buyer  glue  which  is  merchantable 
glue,  but  it  not  good  furniture  glue,  as  furniture  glue 
must  be  of  unusual  tenacity.  The  seller  is  liable  here 
under  an  implied  warranty.  He  knew  that  furniture 
glue  was  wanted.  He  was  a  glue  manufacturer,  and 
he  ought  to  have  understood  that  the  buyer  was  look- 
ing to  him  to  furnish  glue  of  a  sort  that  would  not 
only  be  salable  as  glue  but  would  fulfill  the  purpose 
which  the  buyer  had  in  mind  when  he  made  the  pur- 
chase. 

KNOWN,  DESCRIBED  AND  DEFINITE 
ARTICLES. — On  the  other  hand,  if  the  buyer  orders 
what  is  called  a  known,  described  and  definite  article, 
he  takes  upon  himself  the  burden  of  determining 
whether  the  thing  which  he  buys  will  fulfill  his  pur- 
pose or  not.  For  instance,  a  buyer  in  Missouri  ordered 
of  a  boiler  manufacturer  two  boilers  selected  from  the 
catalogue  of  the  boiler  manufacturer,  describing  them 
by  number.  The  boilers  were  good  boilers,  under  or- 
dinary circumstances,  but  the  amount  of  mud  in  the 
Missouri  River,  on  the  banks  of  which  the  boilers 
were  to  be  used,  was  so  great  that  they  could  not  be 
successfully  used  there.  The  buyer  had  no  redress 
against  the  seller  in  that  case.  He  had  taken  upon 
himself  to  specify  the  particular  kind  of  boilers  he 
wanted;  he  got  them  and  they  were  merchantable 
boilers.  The  only  trouble  was  that  they  were  not  fit 
for  use  in  the  place  where  the  buyer  was  intending  to 


COMMERCIAL    LAW  281 

use  them.  If  the  buyer  had  simply  ordered  boilers 
for  a  factory  on  the  Missouri  River,  the  result  might 
well  have  been  the  other  way,  for  that  would  have 
put  the  duty  on  the  seller  to  furnish  something  that 
was  suitable  for  that  purpose. 

RELIANCE  ON  THE  SELLER  IS  THE 
ESSENTIAL  ELEMENT.~-The  great  thing  to  re- 
member throughout  the  whole  subject  is  that  the 
implied  warranty  of  quality  depends  on  the  justifiable 
reliance  of  the  buyer  on  the  seller's  skill.  If  the  goods 
are  not  merchantable  under  circumstances  where  the 
buyer  does  rely,  he  can  recover  from  the  seller,  even 
though  the  seller  was  not  guilty  of  negligence.  A 
warranty  is  not  dependent  on  negligence  of  the  seller. 

REMEDIES  FOR  BREACH  OF  WAR- 
RANTY.— One  of  the  remedies,  allowed  in  many  but 
not  all  States,  for  breach  of  warranty,  is  to  return  the 
goods  and  demand  the  purchase  money  back;  but 
that  is  only  one  remedy.  Another  remedy,  which  is 
universally  allowed,  is  to  sue  for  whatever  damage 
the  breach  of  warranty  may  have  caused,  and  one  or 
two  cases  will  show  how  serious  these  damages  may 
be.  A  seller  sells  a  pair  of  sheep  to  a  buyer  with  a 
warranty,  express  or  implied,  of  their  soundness. 
They  have  an  infectious  disease,  and  when  put  with 
a  large  flock  of  the  buyer's  sheep  they  infect  the  whole 
flock,  and  the  damage  is  the  loss  of  the  whole  flock. 
Another  actual  case  was  based  on  an  implied  war- 
ranty of  the  quality  of  rags  sold  to  a  paper  manufac- 
turer. The  rags  came  from  Turkey  and  were  infected 
with  smallpox.  They  gave  smallpox  to  the  operatives 


282  COMMERCIAL    LAW 

in  the  buyer's  mill,  and  the  mill  had  to  be  closed  down, 
which  caused  great  loss  to  the  manufacturer.  All  that 
loss  can  be  recovered  from  the  seller  of  the  rags,  even 
though  he  was  not  negligent  in  bringing  the  result 
about. 

ONLY  ORIGINAL  BUYER  CAN  RECOVER 
ON  A  WARRANTY.— Nobody,  however,  can  re- 
cover on  a  warranty  except  the  original  buyer.  For 
instance,  the  operatives  who  caught  smallpox  could 
not  sue  the  seller  unless  the  seller  was  negligent.  If 
he  had  been  careless  or  negligent  in  disregarding 
their  safety,  they  could  sue  him  in  an  action  of  tort, 
though  they  had  no  contractual  relation  with  him. 
And  if  the  buyer  resells  the  goods  the  purchaser  from 
him  cannot  sue  on  a  warranty  given  to  the  original 
buyer. 

EFFECT  OF  ACCEPTING  DEFECTIVE 
GOODS. — Another  matter  that  has  caused  consider- 
able litigation  in  regard  to  warranty  and  the  obliga- 
tion of  the  seller  in  regard  to  the  quality  of  goods,  is 
the  effect  of  acceptance  by  the  buyer  of  goods  which 
are  offered  to  him.  Suppose  a  certain  quantity  of 
Manila  sugar  is  offered  to  one  who  has  agreed  to  buy, 
and  he  takes  from  the  seller  that  quantity  of  sugar, 
but  finds  it  is  not  of  as  good  quality  as  it  ought  to 
have  been.  The  buyer  subsequently  objects,  but  the 
seller  says,  "You  should  have  objected  to  that  at  the 
outset  and  refused  to  take  it.  Your  taking  it  is  an 
assent  or  acceptance  of  it  as  a  fulfillment  of  the  con- 
tract, and  any  right  you  may  have  had  is  now  gone." 
It  is  settled  law  that  if  the  defect  was  not  observable 


COMMERCIAL    LAW  283 

with  reasonable  care,  the  buyer  does  not  lose  any  right 
by  taking  the  goods,  provided  he  gave  prompt  notice 
of  the  defect  as  soon  as  it  was  discovered.  Further, 
even  though  at  the  time  of  delivery  the  buyer  ob- 
served the  defect  or  might  have  observed  it,  it  is  the 
law  of  most  but  by  no  means  all  States,  that  taking 
the  goods  does  not  necessarily  indicate  assent  to  re- 
ceive them  as  full  satisfaction  of  the  seller's  obliga- 
tion. The  buyer  may  receive  the  defective  goods  as 
full  satisfaction,  but  the  mere  fact  of  taking  them  does 
not  prove  it.  It  is  advisable,  however,  for  the  buyer 
as  soon  as  he  sees  the  defect  to  protest  against  it.  He 
may  in  most  States  safely  take  the  goods  if  he  says  in 
taking  them,  "These  goods  are  defective  and  I  do 
not  take  them  in  full  satisfaction ;"  or,  if  he  does  not 
discover  the  defect  immediately  on  taking  the  goods, 
he  ought  to  give  notice  as  soon  as  he  does  discover 
that  the  goods  are  defective,  and  state  that,  though 
he  proposes  to  keep  them,  he  does  so  subject  to  a 
claim  for  their  defective  quality. 

SELLER'S  RIGHTS  WHERE  BUYER  FAILS 
TO  ACCEPT  GOODS.— Now  the  seller  has  some 
rights,  also,  that  should  be  referred  to.  In  the  first 
place,  if  the  buyer  refuses  to  take  title  to  the  goods 
when  they  are  tendered  to  him,  the  seller  has  a  right 
to  recover  damages.  The  amount  of  damages  will  be 
the  difference  between  the  value  of  the  goods  which 
the  seller  still  retains,  because  the  buyer  will  not  take 
them,  and  the  contract  price  which  was  promised.  If 
the  goods  are  worth  as  much  as  the  price  promised 
for  them,  the  seller's  damages  will  be  only  nominal, 


284  COMMERCIAL   LAW 

for  he  still  has  the  goods  and  may  sell  them  to  some- 
body else  for  as  good  a  price  as  was  stipulated  in  the 
original  bargain. 

SELLER  MAY  RECOVER  PRICE  WHERE 
TITLE  HAS  PASSED.— If  the  title  to  the  goods  has 
passed,  the  seller  may  sue  for  the  price.  This  right  to 
the  price  is  secured  by  a  lien  on  the  goods  as  long  as 
the  seller  retains  possession  of  them.  If  the  seller  has 
parted  with  possession  and  with  title,  he  cannot  get 
the  goods  back  except  in  one  narrow  class  of  cases. 

STOPPAGE  IN  TRANSIT.— If  the  goods  are 
in  the  hands  of  a  carrier,  or  other  intermediary  be- 
tween the  seller  and  buyer,  even  though  title  passed 
on  delivery  to  the  carrier,  the  seller  may  stop  the 
goods  in  transit  if  the  buyer  becomes  insolvent  before 
they  are  actually  delivered  to  the  buyer.  The  right 
is  exercised  by  notifying  the  carrier  to  hold  the  goods 
for  the  shipper  since  the  buyer  has  become  insolvent. 
The  right  of  lien  and  of  stoppage  in  transit  is  given 
the  seller  to  enable  him  to  secure  the  price,  which  is 
the  thing  of  interest  to  him  in  the  contract. 

LEGAL  AND  EQUITABLE  TITLES.— A 
legal  title  is  a  full  right  of  ownership  against  every- 
body. The  legal  owner  can  take  his  goods  wherever 
he  finds  them.  An  equitable  title  is  a  right  to  have  the 
benefit  of  the  goods  or  property,  and,  also,  it  fre- 
quently involves  a  right  to  have  the  legal  title  trans- 
ferred to  the  equitable  owner,  making  him  full  legal 
owner.  The  peculiar  feature  of  an  equitable  title, 
however,  is  that  it  is  good  only  against  the  particular 
person  who,  as  the  phrase  goes,  is  subject  to  the 


COMMERCIAL   LAW  285 

equity,  and  also  against  any  person  who  has  acquired 
the  property,  either  without  giving  value  or  with 
knowledge  of  the  equity.  To  put  the  matter  con- 
versely, an  equitable  title  is  not  good  against  a  pur- 
chaser for  value  without  notice,  or,  in  the  language  of 
the  Negotiable  Instruments  Law,  against  a  holder  in 
due  course. 

FRAUDULENT  SALES.— This  principle  is  im- 
portant in  other  branches  of  the  law  besides  that 
governing  negotiable  instruments.  The  most  com- 
mon case  of  equitable  rights  in  sales  arises  in  fraudu- 
lent sales.  Where  a  sale  is  induced  by  fraud  of  the 
buyer,  he  gets  the  legal  title  to  the  goods,  but  the 
seller  has  an  equitable  title  or  right  to  get  the  goods 
back.  Let  us  see  how  this  works  out.  The  buyer  pro- 
cures goods  by  fraud  and  he  sells  them  to  A.  Now, 
the  defrauded  seller  cannot  get  the  goods  back  from 
A  if  A  paid  value  for  them  in  good  faith.  If  A  did  not 
pay  value  in  good  faith,  then  the  defrauded  seller  may 
get  the  goods  from  him  or  anybody  who  stands  in 
the  same  position.  If  the  defrauded  seller  can  reach 
the  goods  before  they  have  left  the  hands  of  the 
fraudulent  person,  he  may  replevy  them  or  he  may 
seize  them  if  that  is  possible.  It  is  not  worth  while 
to  go  into  the  various  kinds  of  fraud  that  may  be 
practiced  in  the  sale  of  goods,  but  there  is  one  specific 
kind  that  comes  up  very  commonly  which  is  worth 
mentioning;  that  is,  buying  goods  with  an  intention 
not  to  pay  for  them.  Generally,  in  order  to  create  a 
fraudulent  sale,  it  is  necessary  that  the  fraudulent 
person  shall  have  made  some  misrepresentation  in 


286  COMMERCIAL   LAW 

words,  but  here  is  a  case  where,  though  it  may  be  said 
there  is  a  misrepresentation,  it  is  not  put  in  words.  It 
may  be  said  there  is  a  misrepresentation,  for  it  is  fair 
to  say  that  every  buyer  when  he  buys  goods  not  only 
promises  to  pay  but  represents  that  his  intention  is 
to  pay  for  the  goods,  and  perhaps  that  his  financial 
condition  is  not  so  hopeless  as  to  make  the  expecta- 
tion utterly  impossible  of  fulfillment.  If  the  situation 
actually  was  that  the  buyer  either  had  a  positive  in- 
tention not  to  pay,  or  was  so  hopelessly  insolvent  that 
any  reasonable  person  would  know  he  could  not  pay 
for  the  goods,  the  transaction  is  fraudulent ;  the  seller 
still  retains  an  equity,  and  may  reclaim  the  goods  from 
the  buyer  who  has  acquired  a  legal  title  or  from  any 
other  person  except  a  bona  fide  purchaser.  (A  draft 
of  a  statute  to  punish  the  making  or  use  of  false  state- 
ments to  obtain  property  or  credit,  jointly  prepared 
by  the  General  Counsel  of  the  American  Bankers  As- 
sociation and  Counsel  for  the  National  Association  of 
Credit  Men,  has  been  enacted  in  the  form  recom- 
mended, or  with  more  or  less  modification,  in  a  ma- 
jority of  the  States.  This  statute  provides,  in  sub- 
stance, that  "any  person  who  shall  knowingly  make 
or  cause  to  be  made  any  false  statement  in  writing, 
with  intent  that  it  shall  be  relied  upon,  respecting  the 
financial  condition,  or  means  or  ability  to  pay,  of  him- 
self, or  any  other  person,  for  the  purpose  of  procuring 
in  any  form  whatsoever,  either  the  delivery  of  per- 
sonal property,  payment  of  cash,  making  of  a  loan, 
extension  of  credit,  etc.,  for  the  benefit  of  either 
himself   or   of   such   other   person,   shall   be   guilty 


COMMERCIAL    LAW  287 

of  a  felony,  and  punishable,  etc.")  This  question 
often  arises  in  bankruptcy:  Suppose  the  buyer  goes 
bankrupt  and  the  goods  come  into  the  hands  of  the 
buyer's  trustee  in  bankruptcy.  The  trustee  in  bank- 
ruptcy is  in  legal  effect,  in  such  a  case,  the  same  per- 
son as  the  bankrupt;  he  is  not  a  bona  fide  purchaser 
from  him,  and  thus  the  seller  may  reclaim  the  goods 
from  the  trustee  in  bankruptcy  just  as  he  might  from 
the  bankrupt.  In  the  case  supposed  the  seller  has  been 
fraudulently  induced  to  part  with  his  title  and  may 
reclaim  it.  A  case  may  be  supposed,  however,  where 
the  seller  fraudulently  retains  his  title,  and  here  the 
buyer's  creditors  may  seize  the  goods  as  if  the  title 
were  in  the  buyer.  Thus  it  is  a  fraud  to  make  a  con- 
ditional sale  of  goods  to  a  person  who  intends,  and 
who  is  understood  to  intend,  to  sell  the  goods  again. 
The  reason  why  it  is  a  fraud  is  because  it  is  inconsis- 
tent on  the  part  of  the  wholesaler  to  say,  "I  retain 
title  to  the  goods  until  paid  for,  yet  I  give  them  to 
you,  knowing  that  you  are  going  to  put  them  in  your 
stock  of  trade." 

DESTRUCTION  OF  GOODS  SOLD.— The 
question  sometimes  arises  as  to  the  effect  of  the  de- 
struction of  the  goods  sold  or  contracted  to  be  sold. 
The  Sales  Act  in  Sections  7  and  8  governs  this : 

Section  7.  (1)  Where  the  parties  purport  to  sell 
specific  goods,  and  the  goods  without  the  knowledge 
of  the  seller  have  wholly  perished  at  the  time  when  the 
agreement  is  made,  the  agreement  is  void. 

(2)  Where  the  parties  purport  to  sell  specific 
goods,  and  the  goods  without  the  knowledge  of  the 


288  COMMERCIAL    LAW 

seller  have  perished  in  part  or  have  wholly  or  in  a 
material  part  so  deteriorated  in  quality  as  to  be  sub- 
stantially changed  in  character,  the  buyer  may  at  his 
option  treat  the  sale: 

(a)  As  avoided,  or 

(b)  As  transferring  the  property  in  all  of  the 
existing  goods  or  in  so  much  thereof  as  have  not  de- 
teriorated, and  as  binding  the  buyer  to  pay  the  full 
agreed  price  if  the  sale  was  indivisible,  or  to  pay  the 
agreed  price  for  the  goods  in  which  the  property 
passes  if  the  sale  was  divisible. 

Sec.  8(1)  Where  there  is  a  contract  to  sell  specific 
goods,  and  subsequently,  but  before  the  risk  passes 
to  the  buyer,  without  any  fault  on  the  part  of  the 
seller  or  the  buyer,  the  goods  wholly  perish,  the  con- 
tract is  thereby  avoided. 

(2)  Where  there  is  a  contract  to  sell  specific 
goods,  and  subsequently,  but  before  the  risk  passes 
to  the  buyer,  without  any  fault  of  the  seller  or  the 
buyer,  part  of  the  goods  perish  or  the  whole  or  a  mate- 
rial part  of  the  goods  so  deteriorate  in  quality  as  to 
be  substantially  changed  in  character,  the  buyer  may, 
at  his  option  treat  the  contract: 

(a)  As  avoided,  or 

(b)  As  binding  the  seller  to  transfer  the  prop- 
erty in  all  of  the  existing  goods  or  in  so  much  thereof 
as  have  not  deteriorated,  and  as  binding  the  buyer  to 
pay  the  full  agreed  price  if  the  contract  was  indi- 
visible, or  to  pay  the  agreed  price  for  so  much  of  the 
goods  as  the  seller,  by  the  buyer's  option,  is  bound  to 
transfer  if  the  contract  is  divisible. 


COMMERCIAL    LAW  289 

CONDITIONAL  SALES.  —  Certain  transac- 
tions in  which  personal  property  is  held  as  security, 
which  are  somewhat  analogous  to  mortgages  and 
which  are  very  common,  may  now  be  referred  to. 
They  may  be  classed  thus :  Conditional  sales,  consign- 
ments, leases  and  chattel  mortgages.  A  conditional 
sale,  as  that  term  is  commonly  used,  is  a  transfer  of 
the  possession  of  personal  property  under  an  agree- 
ment to  sell,  the  seller  expressly  retaining  the  title. 
Here  we  have  possession  and  title  divided.  If  it  were 
not  for  the  express  agreement  that  title  should  remain 
in  the  seller,  the  delivery  of  the  goods  to  the  buyer, 
with  his  agreement  to  pay  for  them,  would  indicate  a 
transfer  of  title  to  the  buyer.  The  purpose  of  the 
seller  in  making  a  conditional  sale  is  to  retain  security 
for  the  price  which  the  buyer  cannot  pay  all  at  once. 
Conditional  sales  are  most  common  in  regard  to  fur- 
niture and  machinery  of  various  kinds.  Creditors  of 
the  buyer  naturally  suppose  that  the  goods  in  his  pos- 
session are  his,  and  it  is  to  avoid  deception,  or  possible 
deception,  that  most  States  require  that  the  condi- 
tional sale  be  recorded,  so  that  creditors  and  every- 
body else  may  have  notice  that,  although  the  buyer 
seems  to  be  owner  of  this  property,  he  is  not  so  in 
reality.  But,  in  Massachusetts,  record  is  not  required, 
and  conditional  sales,  other  than  those  of  household 
furniture,  need  not  even  be  in  writing.  The  seller  is 
secured  by  this  sort  of  bargain  in  several  ways.  If 
the  buyer  does  not  pay  the  price  when  it  is  due,  the 
seller  may  take  the  goods  back.  They  are  his  goods 
and  therefore  he  may  reclaim  them.  Or  the  seller  may 


290  COMMERCIAL   LAW 

conclude  that  it  is  better  to  sue  for  the  price,  and  may 
decide  to  let  the  buyer  keep  the  goods  and  himself 
collect  a  judgment  for  the  price  by  levying  on  any 
property  the  buyer  may  have,  including  that  v^^hich 
was  conditionally  bought.  Even  though  the  buyer 
has  paid  a  large  part  of  the  price  of  the  goods,  the 
seller  may,  nevertheless,  reclaim  the  goods.  The 
seller's  course  will  be  dictated  largely  by  how  much 
of  the  price  has  been  paid.  If  a  large  part  has  been 
paid,  the  seller  will  very  likely  prefer  to  reclaim  the 
goods  unless  they  are  household  furniture.  Why,  it 
may  be  asked,  does  a  buyer  enter  into  a  conditional 
sale,  which  is  rather  a  poor  bargain  as  far  as  he  is 
concerned?  The  reason,  of  course,  is  that  he  cannot 
pay  cash  and  he  wants  the  use  of  the  goods  at  once, 
and  the  conditional  sale  enables  him  to  get  them.  By 
statute,  in  some  jurisdictions,  the  conditional  buyer  is 
protected  after  he  has  paid  a  considerable  portion  of 
the  price;  either  by  extending  the  time  within  which 
he  may  pay  the  balance  due,  or  by  requiring  a  sale  of 
the  goods  and  the  return  to  the  buyer  of  any  surplus. 
CONSIGNMENT.  —  How  does  a  consignment 
differ  from  a  conditional  sale?  When  goods  are  sent 
or  consigned  it  means  that  the  person  to  whom  they 
are  sent  is  agent  for  the  person  who  sends  them. 
The  consignment  is  like  the  conditional  sale  in  this 
respect,  that  the  person  who  has  possession  of  the 
goods  has  not  the  title.  The  consignment  differs 
vitally  from  a  conditional  sale  in  this  respect,  how- 
ever, that  the  consignee  is  not  a  debtor  for  the  price. 
If  the  consignee  sells  the  goods,  then  he,  of  course, 


COMMERCIAL    LAW  291 

must  turn  over  the  price  to  the  consignor  less  such 
commission  as  he  takes,  or  if  the  transaction  was  not 
on  commission,  then  the  consignee  must  pay  to  the 
consignor  the  price  it  was  bargained  the  consignor 
should  receive.  But  until  the  goods  are  resold  they 
remain  the  consignor's  and  at  his  risk.  If  goods  con- 
ditionally sold  are  destroyed,  the  conditional  buyer 
must,  nevertheless,  pay  for  them.  They  are  at  his  risk 
and  he  is  an  absolute  debtor  for  the  price;  but  the 
consignee  merely  holds  the  goods  as  agent  until  a 
purchase  takes  place. 

LEASES  OF  CHATTELS.— Sometimes  goods 
are  leased.  Here,  again,  we  have  the  same  point  of 
similarity,  that  the  person  who  has  possession  of  the 
goods  is  not  the  owner.  The  lessee,  like  a  consignee, 
is  not  a  debtor  for  the  price;  he  is  a  debtor  for  rent, 
but  he  is  not  a  debtor  for  the  price  of  the  goods.  Often 
leases  contain  an  option  to  purchase,  and  a  lease  with 
an  option  to  purchase  is  used  by  piano  dealers  and 
others  as  an  alternative  mode  of  dealing  with  custom- 
ers unable  to  pay  cash,  instead  of  a  conditional  sale; 
but  it  is  not  the  same  thing,  for  if  a  piano  were  de- 
stroyed without  fault  of  either  party  after  it  had  been 
leased  with  an  option  to  purchase,  the  loss  would  be 
on  the  seller.  If  the  option  to  pay  had  been  exercised, 
of  course,  the  loss  would  be  on  the  buyer. 

CHATTEL  MORTGAGES.  —  The  goods  are 
here  owned  originally  by  the  mortgagor,  and  they 
ordinarily  remain  in  his  possession  after  he  has  trans- 
ferred them  by  the  mortgage.  The  fundamental  prin- 
ciples governing  chattel  mortgages  are  the  same  as 


292  COMMERCIAL    LAW 

those  which  govern  mortgages  of  real  estate.  Chattel 
mortgages  must  be  in  writing  and  recorded,  or  the 
mortgaged  property  must  be  delivered  to  the  mort- 
gagee; otherwise  they  are  invalid  against  the  cred- 
itors or  trustee  in  bankruptcy  of  the  mortgagor ;  that 
is,  one  may  mortgage  his  chattels,  either  by  delivering 
them  to  the  mortgagee  or  by  making  a  writing  and 
having  that  recorded.  Even  without  record  or  de- 
livery it  is  good  between  the  parties,  but  it  is  not 
good  in  case  of  bankruptcy  against  the  trustee  in 
bankruptcy  of  the  mortgagor,  nor  is  it  good  against 
attaching  creditors  if  there  is  no  bankruptcy. 

MORTGAGES  OF  FUTURE  GOODS.— An 
agreement  is  sometimes  made  to  make  a  mortgage  of 
goods  which  do  not  at  the  time  exist,  or  are  not  at 
the  time  defined.  This  is  especially  common  in  regard 
to  a  stock  of  goods.  A  wants  to  borrow  money  on  his 
stock  of  goods  in  his  shop.  His  stock  may  be  worth 
$25,000  and  A  has  not  capital  enough  to  get  along 
without  mortgaging  it.  Of  course,  he  can  mortgage 
the  existing  stock  of  goods  without  difficulty,  but  the 
trouble  is  he  wants  to  keep  on  doing  business,  and  sell 
in  regular  course  of  business  the  mortgaged  stock  of 
goods.  That,  too,  would  be  easy  enough  if  the  mort- 
gagee were  willing  to  agree  to  it,  but  the  mortgagee 
is  not  willing  to  agree  unless  equal  security  is  substi- 
tuted for  any  goods  that  are  sold.  What  they  would 
like  to  provide  is  that  the  mortgagor  shall  have  power 
to  sell  the  existing  goods  if  he  chooses  in  the  ordinary 
course  of  business,  provided  he  always  keeps  a  stock 
of  goods  on  hand  equal  to  that  on  hand  at  the  time  the 


COMMERCIAL    LAW  293 

mortgage  was  made,  the  idea  being  that  as  one  thing 
is  released  from  the  lien  of  the  mortgage  other  things, 
of  at  least  equal  value,  shall  replace  it.  It  is  not  an 
unreasonable  transaction,  from  a  business  standpoint, 
but  the  law  generally  does  not  allow  it  validity  except 
to  this  extent.  It  is  valid  as  between  the  parties  so 
far  as  to  give  the  mortgagee  a  power  at  any  time  to 
take  possession,  and  when  he  does  take  possession  the 
mortgage  is  valid  as  to  the  goods  of  which  he  takes 
possession  against  creditors  or  anybody  else.  The 
mortgagee  may  thus  take  possession  right  up  to  the 
time  of  the  mortgagor's  bankruptcy,  or  at  any  time 
prior  to  actual  seizure  of  the  stock  of  goods  on  an 
attachment.  This  gives  the  mortgagee  some  security 
if  the  mortgagor  will  be  good  enough  to  give  the 
mortgagee  a  hint  when  it  is  wise  for  the  mortgagee  to 
take  possession,  because,  as  the  mortgagee  can  take 
possession  just  before  bankruptcy  or  just  before  an 
attachment,  the  mortgagee  will  be  protected.  But,  of 
course,  there  is  a  chance  that  the  mortgagee  may  not 
get  the  goods,  and  therefore  this  form  of  security,  in 
most  States,  is  not  now  advised,  although  it  has  been 
much  attempted  in  the  past.  In  some  States,  however, 
such  a  mortgage  gives  a  right  against  goods  after- 
wards acquired,  which  is  superior  to  that  of  attaching 
creditors  or  of  a  trustee  in  bankruptcy,  even  though 
the  mortgagee  does  not  take  possession. 

GIFTS. — A  gift  is  the  immediate  voluntary 
transfer  of  personal  property.  To  make  a  valid  gift, 
therefore,  it  must  be  voluntary,  gratuitous,  and  ab- 
solute.   As  has  been  explained,  a  gift  is  distinguished 


294  COMMERCIAL    LAW 

from  a  sale  or  a  contract  to  sell  by  the  fact  that  it  is 
gratuitous.  Gifts  are  usually  divided  into  two  classes: 
gifts  "inter  vivos"  and  gifts  "causa  mortis."    There 
is  no  distinction  between  these  two  kinds  of  gifts,  so 
far  as  the  necessity  of  the  intent  to  deliver  title  and 
delivery  of  the  property  are  concerned,  but  the  dis- 
tinction lies  in  the  fact  that  in  gifts  "causa  mortis," 
the  change  in  title  is  defeasible  upon  certain  condi- 
tions.   The  ordinary  gift  "inter  vivos,"  "between  liv- 
ing people"  is  irrevocable  when  completed.    The  gift 
"causa  mortis,"  that  is,  one  made  by  a  person  in  im- 
mediate apprehension  of  death,  is  always  subject  to 
the  condition  that  if  the  person  recovers,  the  title  to 
the  property,  which  he  has  given  away,  reverts  to 
him.    For  A,  who  is  in  his  last  illness,  to  say  to  B, 
who  is  sitting  near  his  bedside,  "I  wish  you  to  have 
my  gold  watch  when  I  am  gone,  but  my  brother  is 
wearing  it  now  in  Europe"  would  not  be  a  gift  "causa 
mortis."     There  is  no  delivery.     It  would  not  pass 
title,  upon  his  death,  to  his  friend  because  in  order  to 
dispose  of  property  after  one  is  dead,  a  will  is  neces- 
sary.   Even  between  the  parties  gifts  are  invalid  un- 
less accompanied  by  delivery,  or  made  by  deed  under 
seal.     The  transaction  without  delivery  or  deed  is, 
in  effect,  a  promise  to  give,  and  there  being  no  consid- 
eration the  promisor  may  subsequently  refuse  to  keep 
his  promise.    If  a  savings-bank  book,  a  bond,  a  stock 
certificate,  a  life-insurance  policy,  a  note  or  check  of 
a  third  person  (but  not  one  made  by  the  giver),  or 
any  chattel  property  is  delivered  to  the  donee,  the 
gift  is  binding  and  irrevocable;  but  otherwise  the 


COMMERCIAL    LAW  295 

donee  gets  absolutely  nothing  and  the  donor's  ex- 
ecutor is  entitled  to  the  property  attempted  to  be  dis- 
posed of  by  gift,  and  must  treat  it  as  part  of  the  assets 
of  the  estate. 

ILLUSTRATION.— A  recent  case  in  New  Jer- 
sey shows  clearly  the  effects  of  the  application  of  the 
rules  just  described.  In  Bailey  v.  Orange  Memorial 
Hospital,  102  Atl.  7,  the  facts  were  that  the  testatrix 
died  about  June  10,  1893,  leaving  a  will,  which  had 
been  duly  probated,  and  under  which  the  complain- 
ants had  qualified  as  executors.  Among  the  papers, 
which  the  executors  found  in  the  testatrix's  safe  de- 
posit box  after  her  death,  was  a  certificate  made  in  her 
name  for  fifty  shares  of  the  capital  stock  of  the  United 
N.  J.  Railroad  and  Canal  Co.,  bearing  the  following 
indorsement,  "For  value  received  I  hereby  assign  and 
transfer  unto  the  Orange  Memorial  Hospital  fi.fty 
shares  of  the  capital  stock  represented  by  the  within 
certificate  and  do  hereby  irrevocably  constitute  and 

appoint attorney  to  transfer  the  said 

stock  on  the  books  of  the  within  named  corporation 
with  full  power  of  substitution  in  the  premises. 

Mary  Campfield. 
"Dated  Oct.  28,  1911. 
"Witnessed  by  James  C.  MacDonald." 
In  the  same  envelope  containing  this  certificate  the 
executors  also  found  the  following  letter  in  the  hand- 
writing of  Mrs.  Campfield:  "To  my  executors:  The 
accompanying  certificate  of  fifty  shares  of  the  United, 
etc.  Co.  is  my  gift  to  the  Orange  Memorial  Hospital 
for  a  bed  to  be  called  the  'Mahlon  Campfield  Bed.'  The 


296  COMMERCIAL    LAW 

stock  has  been  retained  since  its  date  of  transfer  be- 
cause I  desire  to  be  benefited  by  the  dividends  there- 
on as  long  as  I  live. 

Mary  Campfield. 
"Dated  Oct.  28, 1911." 

In  this  box  Mrs.  Campfield  kept  her  bonds  and 
mortgages,  stock  certificates,  and  other  valuable 
papers  relating  to  her  own  property  and  to  the  estate 
of  her  husband,  of  which  she  was  executrix.  There 
were  two  sets  of  keys  to  the  box,  one  of  which  was  in 
Mrs.  Campfield's  possession,  and  the  other  in  the 
possession  of  one  of  her  executors,  who  assisted  her 
for  some  time  in  the  management  of  her  affairs. 
Shortly  before  the  indorsement  on  the  certificate  was 
made,  and  the  letter  written,  Mrs.  Campfield  re- 
quested Mr.  Everett,  the  executor,  to  take  the  stock 
certificate  from  her  box  and  deliver  it  to  her  attorney, 
stating  that  she  would  let  her  attorney  know  in  a  few 
days  what  to  do  about  it.  A  few  days  later  the  attor- 
ney handed  Mr.  Everett  an  envelope  containing  the 
stock  certificate,  and  told  him  there  was  a  letter  with 
it.  Mr.  Everett  saw  the  certificate  but  did  not  see 
the  letter,  and  he  placed  the  envelope  containing  the 
certificate  in  the  safe  deposit  box.  The  attorney  had 
sealed  the  envelope  after  showing  him  the  certificate. 
After  Mr.  Everett  had  told  Mrs.  Campfield  what  had 
been  done,  she  said,  "Well,  that  is  for  the  hospital 
and  that  settles  it,"  and  she  added:  "It  is  in  an  en- 
velope, as  you  probably  saw,  and  addressed  to  my 
executors,  and  they  will  find  a  letter  inside  telling 
them  what  to  do  with  it."    After  this,  Mrs.  Campfield 


COMMERCIAL    LAW  297 

continued  to  receive  the  dividends  paid  on  these 
shares,  and  there  is  some  evidence  to  indicate  that  she 
had  access  to  the  safe  deposit  box  and  examined  its 
contents  during  the  winter  preceding  her  death.  The 
court,  in  its  opinion,  said:  "I  do  not  think  there  can 
be  any  doubt  of  Mrs.  Campfield's  donative  intention 
regarding  these  shares  of  stock,  and  it  is  equally 
clear  that  she  never  consummated  that  intention  to 
make  the  gift,  by  the  actual  delivery  of  the  stock  to 
the  hospital,  or  to  any  one  as  trustee  for  it;  and  it 
also  appears  that  she  intended  the  gift  should  be 
effective  only  after  her  death.  She  expressly  retained 
the  ownership  and  dominion  over  the  stock  for  the 
purpose,  at  least,  of  collecting  and  enjoying  the  divi- 
dends paid  thereon.  *  *  *  The  gift  of  the  stock  not 
having  been  completed  by  delivery,  or  by  the  relin- 
quishment of  control  over  the  certificate  representing 
it,  the  stock  must  be  declared  to  be  an  asset  of  the 
estate." 


CHAPTER  IX 


Real  Property 


DISTINCTION  BETWEEN  THE  LAW 
GOVERNING  SALES  OF  REAL  AND 
PERSONAL  PROPERTY.— The  main  dis- 
tinction between  the  law  governing  real  and  personal 
property  is  the  increased  formality  necessary  in  trans- 
actions governing  real  estate.  Contracts  for  the  sale 
of  real  estate  must  be  in  writing  and  actual  convey- 
ances of  an  interest  in  land  must  not  only  be  in  writ- 
ing, but,  except  where  seals  have  been  abolished  by 
statute,  must  be  executed  under  seal.  In  order  to 
make  the  transaction  valid  against  third  persons,  rec- 
ord in  the  Registry  of  Deeds  in  the  county  where  the 
land  is  situated  is  also  requisite.  Unless  a  contract 
for  the  sale  of  real  estate  is  recorded,  a  subsequent 
conveyance  to  a  purchaser,  for  value  and  without 
notice,  will  destroy  the  right  of  the  buyer  under  the 
first  contract  to  get  the  land,  though  he  will  still  have 
an  action  for  damages  against  the  seller.  So,  in  many 
jurisdictions,  creditors  of  the  man  contracting  to  sell 
may  by  attaching  the  land  as  the  seller's  property 
satisfy  their  claims  from  it  to  the  detriment  of  the 
buyer's  right.  Therefore,  an  actual  conveyance  of 
real  estate  must  be  recorded  in  order  to  protect  the 
grantee.  As  a  pre-requisite  for  record  it  is  generally 
required  that  contracts  and  deeds  of  real  estate  shall 
be  acknowledged  before  a  notary  public  or  other 
official  authorized  by  law. 

298 


COMMERCIAL    LAW  299 

DUTIES  OF  BUYER  AND  SELLER  UNDER 
CONTRACT  TO  CONVEY  REAL  ESTATE.— 
The  primary  duty  of  the  seller  in  a  contract  to  con- 
vey real  estate  is  to  transfer  a  good  title.  It  is  im- 
portant for  the  buyer  to  determine  before  the  time  for 
performance  whether  the  seller's  title  is  good  in  order 
to  determine  whether  he  himself  will  accept  the  deed 
and  pay  the  price.  Accordingly,  the  buyer  has*  the  title 
examined  by  search  in  the  Registry  of  Deeds.  If  the 
search  discloses  that  the  seller's  title  is  defective  the 
buyer  does  not  on  that  account  necessarily  have  a 
right  to  rescind  the  contract.  The  defect  of  title  may 
be  removed  before  the  time  of  performance,  and  if  the 
nature  of  the  defect  is  such  that  this  is  possible,  the 
buyer  can  only  give  notice  of  the  defect  and  request 
its  removal.  If  the  title  of  the  seller  is  so  defective 
that  it  cannot  be  cured,  or  if  the  seller  manifests  by 
his  conduct  an  intent  to  repudiate  the  contract,  as  by 
selling  the  land  to  another,  the  buyer  need  not  wait 
for  the  time  for  performance,  but  may  at  once  give 
notice  that  he  rescinds  the  contract.  Unless  the 
seller  has  expressly  contracted  to  convey  by  warranty 
deed,  his  obligation  is  generally  satisfied  by  a  quit 
claim  deed.  It  is  well,  therefore,  for  a  purchaser, 
when  he  contracts  to  purchase  a  piece  of  real  property, 
to  insert  in  the  contract  a  clause  to  the  effect  that  the 
seller  agrees  to  convey  by  a  sufficient  warranty  deed. 
The  seller  is  also  bound  not  to  commit  waste  on 
the  premises  between  the  time  of  the  contract  and 
the  time  of  performance.  The  rule  in  regard  to 
accidental  injury  is  stated  hereafter,  but  as  to  in- 


300  COMMERCIAL   LAW 

tentional  or  negligent  injury  of  the  premises,  the 
law  is  clear  that  such  an  injury  is  a  breach  of  duty  by 
the  seller.  The  buyer's  duty  is  to  pay  the  price  ac- 
cording to  the  terms  of  the  contract.  The  obligations 
of  the  seller  to  convey,  and  of  the  buyer  to  buy,  are 
concurrent,  unless  the  contract  expressly  provides  the 
contrary ;  that  is,  the  buyer  in  order  to  acquire  a  right 
against  the  seller  must  tender  payment,  as  he  de- 
mands a  deed;  and  the  seller  in  order  to  acquire  a 
right  against  the  buyer  must  tender  a  proper  deed 
when  demanding  payment.  The  obligation  of  either 
party  to  tender  may,  however,  be  excused  by  circum- 
stances showing  that  tender  would  be  useless.  Thus, 
if  the  buyer  is  insolvent,  the  seller  need  not  tender  a 
deed,  and  if  the  buyer  has  repudiated  the  contract  or 
committed  waste  to  a  material  extent,  or  conveyed 
the  premises  to  a  third  person,  the  buyer  need  not 
tender  payment,  in  order  to  acquire  a  right  of  action. 
But  if  there  is  any  doubt  at  all,  the  purchaser  or  the 
seller,  as  the  case  may  be,  should  make  a  tender,  so  as 
to  preserve  his  legal  rights. 

DOWER  AND  CURTESY.— By  the  common 
law  a  wife  on  her  marriage  acquired  a  right  in  her 
husband's  land,  which,  though  not  vesting  until  his 
death,  encumbered  the  title  immediately.  On  his 
death  she  became  entitled  to  a  life  estate  in  a  one- 
third  interest  of  all  the  lands  of  which  he  had  been 
possessed  since  the  date  of  their  marriage.  Accord- 
ingly, where  the  common  law  rule  of  dower  still  pre- 
vails, a  husband  cannot  give  an  unencumbered  title 
to  real  estate  unless  his  wife  joins  in  the  conveyance. 


COMMERCIAL    LAW  301 

Similarly  a  husband  was  entitled  at  common  law  to  a 
life  interest  in  the  lands  of  his  deceased  wife  if  they 
had  had  a  child  born  alive.  This  was  called  the  estate 
by  curtesy.  Its  extent,  it  will  be  observed,  is  not  the 
same  as  that  of  dower.  The  husband's  life  interest 
extended  to  all  the  lands  of  the  wife,  but  on  the  other 
hand,  it  did  not  arise  at  all  unless  there  was  a  child 
born  alive;  whereas  the  wife's  dower  right  arose  im- 
mediately on  marriage.  The  rules  of  dower  and 
curtesy  have  been  changed  by  statute  to  a  greater  or 
less  extent  in  most  States,  but  it  is  still  almost  uni- 
versally important  that  a  wife  should  join  in  her  hus- 
band's conveyance  of  real  estate,  and  that  a  husband 
should  join  in  a  wife's  conveyance  of  her  real  estate. 

DEFAULT  IN  PERFORMANCE.— The  law 
regards  more  leniently  a  default  in  time  in  carrying 
out  contracts  for  the  sale  of  real  estate  than  it  does  a 
similar  default  in  the  sale  of  personal  property.  In 
sales  of  personal  property,  especially  if  it  is  of  a  char- 
acter which  rapidly  fluctuates  in  value,  time  is  said 
to  be  "of  the  essence;"  that  is,  the  failure  of  either 
party  to  perform  at  or  about  the  agreed  day  is  fatal 
to  his  rights  to  enforce  the  contract ;  but  in  the  case  of 
real  estate  it  is  generally  held  that  time  is  not  of  the 
essence  of  the  contract  unless  it  is  either  expressly  so 
provided  in  the  contract,  or  the  circumstances  of  the 
case  are  such  as  to  show  that  time  was  a  matter  of 
vital  importance. 

DESTRUCTION  OF  PREMISES.— Where 
personal  property,  which  the  owner  has  contracted  to 
sell,  is  destroyed,  the  loss  is  the  seller's  provided  the 


302  COMMERCIAL    LAW 

title  is  still  in  him,  and  the  buyer  has  committed  no 
default;  but  in  most  jurisdictions,  if  real  estate  is 
similarly  destroyed,  the  buyer  must  nevertheless  pay 
the  price.  In  the  absence  of  special  provisions  in  a 
contract  of  sale,  if  a  house  on  the  premises  sold  has 
burned  between  the  time  of  the  contract  and  the  time 
for  its  performance,  without  fault  of  the  seller,  the 
seller  can  compel  the  buyer  to  accept  a  deed  of  the 
land  without  the  house  and  pay  the  full  price.  This 
rule  has  been  much  criticized,  and  it  is  not  universally 
in  force;  for  example,  it  is  not  the  law  of  Massachu- 
setts. In  some  other  States  the  loss  will  not  fall  upon 
the  buyer  unless  possession  of  the  premises  has  been 
delivered  to  him  under  the  contract,  but  in  New  York, 
and  probably  a  majority  of  the  States,  even  though 
the  seller  still  has  possession,  as  well  as  title,  the  risk 
of  accidental  loss  rests  upon  the  buyer.  Where  risk 
of  destruction  of  the  premises  is  thrown  on  the  buyer, 
immediately  after  he  has  made  a  contract  to  purchase, 
it  is  of  obvious  importance  that  he  should  immediately 
insure  the  premises.  The  insurance  of  the  seller,  un- 
less transferred  to  the  buyer  at  that  time  with  the 
company's  assent,  will  not  protect  the  buyer.  Insur- 
ance is  a  contract  of  personal  indemnity,  and  the  sell- 
er's insurance  only  protects  the  seller's  interest.  The 
result  is  that  if  the  premises  are  destroyed,  the  insur- 
ance company  will  not  be  obliged  to  pay  the  seller  his 
insurance,  since  the  seller,  under  the  contract  of  sale, 
can  recover  from  the  buyer ;  and  even  if  the  insurance 
were  paid  to  the  seller,  the  buyer  could  not  claim  the 
benefit  of  it. 


COMMERCIAL    LAW  303 

SPECIFIC  PERFORMANCE,— In  addition  to 
the  ordinary  remedy  for  a  breach  of  contract,  namely 
an  action  at  law  for  damages,  another  remedy,  that  of 
specific  performance,  is  permitted  in  the  case  of  con- 
tracts for  the  sale  of  land ;  that  is,  the  court  will  actu- 
ally compel  one  who  has  contracted  to  sell  land  to 
make  a  conveyance  thereof  on  receiving  the  agreed 
price,  and  will  similarly  compel  one  who  has  con- 
tracted to  buy  to  pay  the  agreed  price  on  receiving  a 
deed  of  the  premises.  Specific  performance  of  such 
contracts  is  granted  on  the  theory  that  money  dam- 
ages are  an  inadequate  remedy,  and  that  the  nature  of 
the  situation  is  such  that  it  is  possible  to  compel  the 
actual  performance  of  the  contract.  In  contracts  for 
the  sale  of  personal  property,  damages  are  generally 
considered  adequate,  but  contracts  for  the  sale  of  a 
painting  or  a  race-horse  would  be  specifically  enforced. 
Sometimes  the  seller  is  unable  fully  to  perform  his 
agreed  contract.  He  may  not  be  able  to  give  a  title 
free  from  encumbrances,  or  he  may  have  committed 
waste  on  the  premises.  In  such  a  case,  though  the 
buyer  need  not  carry  out  the  contract  unless  he 
wishes,  he  can  if  he  chooses  get  a  conveyance  decreed 
to  him  and  an  allowance  deducted  from  the  price 
commensurate  to  the  injury  caused  by  the  encum- 
brance or  waste.  Specific  performance  will  be  granted 
not  only  against  the  seller,  but  if  the  seller  in  viola- 
tion of  his  contract  has  conveyed  the  land  to  a  third 
person  who  had  notice  of  the  contract  or  who  did  not 
give  value  in  exchange  for  the  land,  the  court  will 
compel  the  grantee  of  the  premises  to  convey  them  to 


304  COMMERCIAL   LAW 

the  person  who  had  the  original  contract  to  buy.  If, 
however,  one  who  has  agreed  to  sell  the  premises 
actually  sells  and  conveys  them  to  another  who  is  a 
purchaser  for  value  without  notice  of  the  prior  con- 
tract, such  a  purchaser  gets  an  indefeasible  title,  and 
the  person  having  the  prior  contract  to  buy  must  re- 
sort, for  his  only  relief,  to  an  action  for  damages 
against  the  seller.  For  this  reason  it  is  important  to 
record  a  contract  to  buy  or  sell.  This  record  operates 
as  notice  to  all  the  world,  and  no  purchaser  subse- 
quent to  the  record  will  have  the  rights  of  a  pur- 
chaser for  value  without  notice. 

VENDOR'S  LIEN.— In  some  States  a  seller  of 
land  who  has  not  been  paid  the  price  is  entitled  to 
what  is  called  a  vendor's  lien  on  the  land.  This  en- 
ables him  to  compel  a  sale  of  the  property  to  satisfy 
his  claim  for  the  purchase  money  unless  the  land  has 
been  conveyed,  before  proceedings  are  brought  to  en- 
force the  lien,  to  a  purchaser  for  value  without  notice 
that  the  original  vendor  is  still  unpaid.  In  many 
States,  however,  the  seller  has  no  vendor's  lien  and 
must  take  a  mortgage  back  for  any  unpaid  portion  of 
the  purchase  price  if  he  desires  security  for  its  pay- 
ment. 

DEFINITION  OF  MORTGAGE.— A  mort- 
gage is  a  transfer  of  property  to  a  creditor  to  secure  a 
debt.  Unless  there  is  a  debt  there  can  be  no  mortgage, 
and  the  original  idea  of  a  mortgage,  still  preserved  in 
the  forms  of  conveyance  in  many  States,  is  that  the 
mortgagor  or  debtor  transfers  the  title  to  the  mort- 
gagee or  creditor.     In  popular  understanding  the 


COMMERCIAL    LAW  305 

mortgagor  owns  the  mortgaged  premises  but  the 
mortgagee  will  take  or  sell  them  if  the  debt  is  in  de- 
fault. The  theory  of  the  common  law,  however,  was 
that  the  mortgagee  became  the  owner  of  the  premises 
as  soon  as  the  mortgage  was  made,  but  that  the 
mortgagor  was  entitled  to  re-acquire  the  ownership 
by  payment  of  the  debt  at  maturity.  Indeed,  early 
mortgages  were  often  made  by  two  separate  instru- 
ments: (1)  an  absolute  deed  of  conveyance  to  the 
mortgagee,  and  (2)  an  instrument  called  a  defeasance 
which  provided  that  on  payment  of  the  amount  of  the 
debt,  on  a  given  day,  the  property  should  revest  in  the 
mortgagor. 

MODERN  AMERICAN  MORTGAGES.— At 
the  present  day  in  many  jurisdictions  a  mortgage  still 
remains,  both  in  the  form  of  the  instrument  and  in  the 
legal  conception  of  the  rights  of  the  parties  funda- 
mentally, the  same  as  under  the  early  doctrines  just 
outlined.  In  other  jurisdictions,  of  which  New  York 
may  be  taken  as  a  typical  State,  the  theory  is  no 
longer  that  the  mortgagee  has  title  to  the  property, 
but  that  he  has  only  a  lien  on  it,  which  he  may  enforce 
if  the  debt  is  not  paid.  The  difference  in  actual  re- 
sults under  the  two  theories,  however,  is  less  than 
might  be  supposed.  Where  the  mortgagee  is  still  re- 
garded as  having  the  title,  his  power  to  make  use  of 
that  title  is  limited  so  that  he  can  only  make  use  of  it 
for  the  purpose  of  securing  payment  of  what  is  due 
him.  On  the  other  hand  where  the  mortgagee  is  re- 
garded as  having  only  a  lien,  the  lien  is  a  legal  right 
against  the  real  estate  which  enables  the  creditor  to 


306  COMMERCIAL    LAW 

enforce  his  claim  against  it  in  practically  the  same 
way  which  he  would  do  were  he  the  owner  of  the  real 
estate. 

COVENANTS  AND  STIPULATIONS.—A 
mortgage  of  real  estate  ordinarily  contains  the  same 
covenants  of  warranty  as  a  warranty  deed  of  real 
estate.  Where  a  mortgage  still  has  its  common  law 
effect  of  transferring  title  to  the  mortgagee,  it  is  es- 
sential that  the  mortgage  should  contain  a  provision 
that  until  default  the  mortgagor  shall  be  entitled  to 
the  possession  of  the  premises.  Covenants  in  regard 
to  the  payment  of  taxes  by  the  mortgagor  and  the 
keeping  of  the  premises  insured  for  a  certain  amount, 
are  usual  and  important  provisions.  There  is  also 
commonly  contained  in  a  mortgage  a  power  of  sale; 
that  is  an  authority  or  agency  given  to  the  mortgagee 
to  sell  the  premises  free  of  the  mortgagor's  right  of 
redemption  in  case  default  of  payment  is  made,  or  in 
case  such  default  continues  for  a  certain  specified 
time.  In  all  States  printed  forms  of  mortgages  are 
ordinarily  used.  These  forms  are  prepared  with  care 
to  suit  the  requirements  of  local  law;  and  if  you  are 
sure  that  the  printed  form  is  prepared  and  sold  for 
use  in  the  State  where  the  mortgaged  land  is  situated, 
you  may  feel  satisfied  that  the  terms  of  the  instrument 
are  suitable  to  protect  the  rights  of  both  parties. 

EXECUTION  AND  RECORD  OF  MORT- 
GAGE.— A  mortgage  of  real  estate  must  everywhere 
be  executed  with  the  same  formality  that  is  necessary 
for  an  ordinary  deed  of  conveyance.  Different  forms 
are  in  use  in  different  States,  and  it  is  always  desirable 


COMMERCIAL    LAW  307 

to  use  the  form  of  mortgage  customary  in  the  State 
where  the  land  lies.  It  is  important  to  ascertain 
whether  a  seal  is  necessary  in  that  State,  and  the  in- 
strument must  ordinarily  be  acknowledged  before  a 
notary  public  having  a  seal,  or  before  a  commissioner 
of  deeds  for  the  State  in  which  the  land  lies.  There 
is  in  every  State  a  recording  act  by  virtue  of  which 
unrecorded  mortgages  are  made  invalid  against  subse- 
quent purchasers  and  sometimes  against  attaching 
creditors.  Though  an  unrecorded  mortgage  is,  as  be- 
tween the  parties,  as  effective  as  if  recorded,  it  is  of 
vital  importance  promptly  to  record  every  mortgage 
in  the  Registry  of  Deeds  in  the  county  where  the  land 
lies. 

SPECIAL  CASES.— Where  a  mortgage  is  ex- 
ecuted by  an  agent  or  by  a  corporation,  it  is  essential 
that  the  agent  or  corporate  officer  have  authority  to 
act.  In  the  case  of  a  corporation  it  is  necessary  both 
that  the  corporation  have  power  to  make  the  mort- 
gage in  question  and  also  that  the  particular  officer  or 
officers  who  attempt  to  exercise  the  power  are  author  ■ 
ied  so  to  do.  The  principles  here  involved,  however, 
are  not  different  from  those  generally  governing  the 
acts  of  agents  and  corporations.  The  same  may  be 
said  in  regard  to  mortgages  by  husband  or  wife,  by  a 
partnership,  or  by  trustees.  In  the  case  of  mortgages 
executed  by  any  such  person  it  is  necessary  to  take 
special  precautions.  A  mortgage  by  husband  or  wife 
should  generally  be  also  executed  by  the  other.  A 
mortgage  by  a  partnership  should  be  executed  in  the 
same  form  in  which  the  title  is  held  by  the  partner- 


308  COMMERCIAL   LAW 

ship,  and  if  the  title  is  held  by  less  than  all  the  part- 
ners, it  is  desirable  that  the  other  partners  should 
express  their  assent  to  the  transaction  either  in  the 
mortgage  itself,  or  in  a  separate  instrument  executed 
with  the  same  formality. 

INTEREST  IN  PROPERTY.— Any  kind  of  in- 
terest in  real  estate  may  be  mortgaged  and  mortgages 
of  property,  not  yet  acquired  by  the  mortgagor,  have 
generally  been  held  to  attach  to  the  property  when 
acquired  by  the  mortgagor,  and  then  to  give  the  mort- 
gagee as  full  a  right  as  if  the  mortgagor  had  owned 
the  premises  at  the  time  he  purported  to  mortgage 
them. 

OTHER  PARTICULARS.— The  description  of 
land  in  a  mortgage  should  have  the  same  exactness  as 
is  necessary  in  a  deed.  Unlike  deeds,  mortgages  or- 
dinarily state  their  consideration  and  must  of  course 
state  the  indebtedness  which  they  are  given  to  secure. 
A  mortgage  may  be  given  to  secure  a  past  debt  if  the 
mortgagor,  when  he  makes  the  mortgage,  is  solvent. 
If  he  is  then  insolvent,  to  give  such  a  mortgage  would 
be  a  preference,  which  is  an  act  of  bankruptcy,  and 
subject  the  mortgagor  to  possible  bankruptcy  pro- 
ceedings. If  the  mortgagee  in  such  a  case  had  reason- 
able cause  to  believe  that  the  mortgagor  was  insolvent, 
the  mortgage  could  also  be  set  aside  by  a  trustee  in 
bankruptcy. 

EQUITY  OF  REDEMPTION.— By  the  terms 
of  the  mortgage  the  mortgagor's  right  is  ordinarily 
made  dependent  on  payment  of  the  debt  on  a  fixed  day, 
or  of  instalments  on  fixed  days.  A  day  thus  fixed  in  the 


COMMERCIAL    LAW  309 

mortgage  is  sometimes  called  the  "law  day."  Accord- 
ing to  the  terms  of  the  instrument  the  only  way  in 
which  the  mortgagor  can  be  revested  with  title  to  the 
property  is  by  complying  with  the  express  terms  of 
the  mortgage  and  paying  the  debt  on  the  law  day.  The 
result  of  this  provision,  if  enforced,  would  be  that  if 
the  debt  is  not  paid  exactly  when  it  is  due,  the  mort- 
gagee remains  the  absolute  owner  of  the  mortgaged 
premises.  Courts  of  equity,  however,  long  ago  lim- 
ited the  mortgagee's  right,  holding  that  the  real  object 
of  the  transaction  is  to  secure  a  debt,  and  that  if  the 
mortgagee  obtains  his  debt  and  interest  he  ought  to 
be  satisfied.  Accordingly  if  the  mortgagor  was  in  de- 
fault in  the  payment  of  the  debt,  he  was  allowed  to 
redeem  the  property  by  payment  of  the  debt  and  in- 
terest until  the  time  of  tender.  If  the  mortgagee  re- 
fused to  accept  his  debt  and  interest,  the  mortgagor 
could  bring  a  suit  in  equity  to  redeem  the  property 
and  the  court  would  order  the  reconveyance  to  him 
of  the  property  on  payment  of  the  debt.  Because  of 
this  right  on  the  part  of  the  mortgagor,  his  interest 
in  the  property  came  to  be  called  an  equity  of  redemp- 
tion, and  it  is  often  so  called  at  the  present  day.  The 
position  taken  by  courts  of  equity,  permitting  re- 
demption, might  work  a  hardship  on  the  mortgagee 
because  he  could  never  feel  sure  of  his  title  to  the 
property,  however  long  the  debt  might  remain  un- 
paid. This  difficulty  was  met  by  allowing  the  mort- 
gagee to  bring  a  suit  to  foreclose  the  debtor's  right  of 
redemption.  We  speak  of  foreclosing  a  mortgage, 
but,  strictly,  it  is  the  debtor's  right  to  redeem  which  is 


310  COMMERCIAL    LAW 

foreclosed.  When  such  a  suit  of  foreclosure  was 
brought  equity  would  fix  a  time  within  which  the 
debtor  might  redeem  the  premises  by  paying  the  debt 
and  interest,  and  then  the  decree  provided  that  if  the 
debtor  failed  to  pay  within  the  named  period,  his  right 
of  redemption  should  be  forever  foreclosed.  At  the 
present  time  there  are  in  practically  all  jurisdictions 
statutory  rules,  in  regard  to  the  foreclosure  of  mort- 
gages, which  we  shall  presently  describe,  but  it  is  im- 
portant to  remember  the  fundamental  nature  of  the 
mortgage  transaction,  and  the  original  remedies  of  re- 
demption and  foreclosure. 

A  RECONVEYANCE  IS  NOT  NECESSARY 
ON  PAYMENT  OF  THE  MORTGAGE.— If  a 
mortgage  is  regarded  as  a  mere  lien  to  secure  a  debt, 
it  is  obvious  that  a  payment  of  the  debt  discharges  the 
lien,  and  the  title  already  vested  in  the  mortgagor  be- 
comes free  from  any  incumbrance.  On  the  theory  of 
the  common  law,  though  the  title  passed  to  the  mort- 
gagee, it  was  subject  to  a  condition  subsequent  which 
would  revest  the  title  in  the  mortgagor  if  payment  of 
the  debt  was  made  at  maturity.  By  mere  operation 
of  law,  therefore,  payment  of  the  mortgage  when  due 
revested  title  in  the  mortgagor  without  reconveyance. 
After  a  default,  however,  a  subsequent  payment  is  not 
strictly  a  performance  of  the  condition  upon  which 
the  mortgaged  deed  provided  that  title  should  revest. 
Accordingly  a  reconveyance  was  necessary  in  such  a 
case  at  common  law,  but  at  the  present  day  it  is  gen- 
erally not  requisite  even  in  case  of  payment  after 
default. 


COMMERCIAL    LAW  311 

THE  MORTGAGOR  IS  LIABLE  AS  A 
DEBTOR. — The  mortgagor  is  bound  as  a  debtor  or- 
dinarily by  a  bond  or  promissory  note  in  which  he  ex- 
pressly agrees  to  pay  the  amount  of  his  debt.  It  is 
perfectly  possible  that  the  debt  secured  by  the  mort- 
gage should  not  be  represented  by  such  an  instrument, 
but  should  rest  merely  in  oral  agreement  or  should 
be  contained  in  a  covenant  in  the  mortgage  deed  itself, 
but  it  is  usual  and  desirable  to  have  a  separate  obliga- 
tion. The  fact  that  the  debtor  has  given  the  mortgage 
does  not  in  any  way  limit  the  rights  of  the  mortgagee 
as  an  ordinary  creditor.  He  may  sue  on  the  mortgage 
debt  when  it  is  due,  in  the  same  manner  as  if  there 
were  no  mortgage.  It  is  his  option  whether  he  will 
foreclose  the  mortgage,  as  a  means  of  collecting  his 
claim,  or  whether  he  will  get  judgment  on  the  debt, 
and  seek  to  collect  that  judgment  in  the  same  way 
that  an  ordinary  judgment  creditor  would.  This  rule 
is  changed  by  statute  in  California,  and  one  or  two 
other  States,  where  by  statute  the  mortgagee  is  re- 
quired to  realize  from  the  mortgaged  property  what 
he  can  before  seeking  a  personal  judgment  against 
the  mortgagor.  In  many  jurisdictions  the  creditor 
may,  in  a  single  proceeding,  obtain  foreclosure  of  the 
mortgagor's  rights  by  sale  of  the  property,  and  a  per- 
sonal judgment  against  the  mortgagor  for  any  defi- 
ciency which  the  proceeds  of  the  property  may  leave. 
This  is  called  a  deficiency  judgment. 

RIGHTS  OF  MORTGAGOR  AND  MORT- 
GAGEE IN  MORTGAGED  LAND.— Even  though 
the  mortgagor  is  regarded  by  the  law  as  having  no 


312  COMMERCIAL    LAW 

longer  the  legal  title  to  the  premises,  but  only  an 
equity  of  redemption,  his  interest  is  regarded  as  real 
estate  and  descends  on  his  death  according  to  the 
laws  governing  real  estate.  The  mortgagee's  inter- 
est, on  the  other  hand,  is  regarded  as  personal  prop- 
erty since  the  debt  which  the  mortgagee  is  intended 
to  secure  is  personal  property,  and  even  a  legal  title 
to  the  real  estate  held  by  the  mortgagee  is  held  merely 
for  security,  and  is  an  incident  to  the  debt.  So  the 
mortgagor's  interest  in  mortgaged  property  is  sub- 
ject to  be  seized  on  execution  by  his  creditors  while 
the  mortgagee's  interest  can  not  be  so  seized.  The 
mortgagee's  creditors  must  reach  his  interest  by 
means  appropriate  to  realize  upon  the  debt,  not  upon 
the  land.  The  mortgagor's  interest  being  regarded 
as  real  estate  will  give  rise  to  the  same  estates  of 
dower  in  favor  of  the  wife  of  the  deceased  mortgagor 
or  curtesy  in  favor  of  the  husband  of  a  deceased  mort- 
gagor, as  are  allowed  by  the  law  in  the  case  of  real 
estate  generally.  The  mortgagor  may,  while  in  pos- 
session, deal  with  the  property  in  any  way  in  which  an 
owner  may,  except  that  he  will  not  be  permitted  to 
imperil  the  mortgagee's  security  by  any  kind  of  waste. 
The  mortgagor  may,  subject  to  the  mortgage,  lease, 
sell  or  devise  it.  He  may  collect  the  rents  and  profits 
and  use  them  as  his  so  long  as  he  is  in  possession. 
Where,  however,  the  mortgagee  is  regarded  as  hav- 
ing the  legal  title  to  the  premises,  he  may  eject  the 
mortgagor  at  any  time  from  possession,  even  though 
the  mortgage  is  not  due,  unless  prohibited  by  statute 
or  by  the  express  terms  of  the  mortgage  deed.     In 


COMMERCIAL    LAW  313 

fact  he  usually  is  so  prohibited.  Even  when  not  so 
prohibited,  it  is  not  always  well  for  a  mortgagee  to 
take  possession  because,  if  he  does  so,  he  is  bound  to 
account  not  only  for  all  profits  actually  received  from 
the  premises,  but  also  for  all  that  might  have  been 
received.  He  becomes  liable  for  any  waste  of  the 
premises  or  any  failure  to  deal  with  them  in  a  reason- 
ably prudent  manner. 

SALE  BY  MORTGAGEE  OR  MORTGAGOR 
OF  REAL  ESTATE.— Either  the  mortgagee  or  the 
mortgagor  may  assign  his  interest.  The  mortgagee 
in  assigning  his  interest  is  in  legal  contemplation  do- 
ing two  things:  (1)  assigning  the  debt;  (2)  assigning 
the  title  or  lien  which  he  holds  on  the  mortgagor's 
real  estate  as  security  for  the  debt.  As  to  the  assign- 
ment of  the  debt,  the  matter  is  governed  by  the  same 
principles  as  govern  the  assignment  of  choses  in  ac- 
tion generally.  That  is,  if  the  mortgaged  debt  is 
represented  by  a  negotiable  instrument,  the  instru- 
ment may  be  negotiated  to  the  purchaser  in  the  or- 
dinary way,  and  with  the  ordinary  effects  of  such  in- 
struments. If  the  mortgaged  debt  is  not  represented 
by  a  negotiable  instrument,  the  assignment  of  the 
debt  is  an  assignment  of  a  chose  in  action.  Where 
the  common  law  view  of  mortgage  still  prevails,  that 
the  mortgagee  has  the  legal  title,  he  can  only  trans- 
fer it  to  an  assignee  by  a  deed  executed  with  the  same 
formalities  necessary  for  the  transfers  of  real  estate. 
As,  however,  the  law  recognizes  that  it  is  the  debt 
which  is  the  essential  feature  of  the  relation  between 
mortgagor  and  mortgagee,  and  that  the  mortgaged 


314  COMMERCIAL    LAW 

estate  is  held  merely  as  security  for  a  debt,  a  valid 
assignment  of  the  debt  is  held  to  make  the  assignee 
equitably  entitled  to  the  mortgaged  property  as  secu- 
rity. And,  in  effect,  one  who  obtains  the  mortgage 
debt  will  secure  the  benefit  of  the  mortgaged  property 
even  though  the  local  law  regards  a  mortgagee  as 
having  the  legal  title.  Where  the  mortgagee  is  re- 
garded as  having  m.erely  a  lien,  the  assignment  of  the 
debt  involves  a  transfer  of  the  lien. 

INCIDENTS  TO  MORTGAGE.— If  the  mort- 
gagor wishes  to  convey  his  interest,  he  transfers  the 
estate  by  deed  exactly  as  if  it  were  unmortgaged,  ex- 
cept that  the  conveyance  is  stated  to  be  subject  to  a 
specified  mortgage,  and  it  is  sometimes  added  "which 
the  grantee  assum.es  and  agrees  to  pay."  It  is  desir- 
able for  the  seller  that  the  grantee  shall  assume  and 
agree  to  pay  the  mortgage  while  it  is  desirable  for  the 
buyer  that  he  shall  buy  the  premises  merely  subject  to 
the  mortgage  without  assuming  it.  The  difference 
between  the  two  transactions  is  this :  In  either  event 
the  grantee  receives  the  premises  burdened  by  a  mort- 
gage, the  amount  of  which  will  be  deducted  from  the 
consideration  paid  as  the  agreed  value  of  the  premises. 
In  either  event,  if  the  debt  is  unpaid,  the  mortgagee 
will  foreclose  and  the  grantee  will  lose  the  premises. 
In  order  to  save  the  premises,  the  grantee  will  have 
to  pay  the  mortgage. 

ASSUMPTION  OF  MORTGAGE.— The  dis- 
tinction is  only  seriously  important  when  the  mort- 
gaged premises  are  worth  less  than  the  amount  of  the 
mortgage.  In  that  event  the  mortgagee  will  be  entitled 


COMMERCIAL    LAW  315 

to  a  deficiency  judgment  against  the  mortgagor.  The 
mortgagor  was  the  original  debtor  and  cannot  escape 
from  his  obligation  to  the  mortgagee  without  the  lat- 
ter's  assent.  If  the  mortgagor  is  forced  to  pay,  he 
cannot  recover  the  amount  from  his  grantee  unless  the 
latter  assumed  and  agreed  to  pay  the  mortgage.  If, 
however,  the  grantee  did  make  such  assumption,  he 
will  ultimately  have  to  pay  the  deficiency.  If  the  mort- 
gagee, without  foreclosing  the  property,  should  sue 
the  mortgagor  directly  on  the  debt,  the  latter  would 
be  compelled  to  pay.  Even  if  the  sale  to  the  mort- 
gagor's grantee  had  been  made  merely  subject  to  the 
mortgage,  the  mortgagor  on  paying  the  debt  would 
be  subrogated  to  the  mortgage  and  would  himself  be 
enabled  to  foreclose  the  property.  But  if  the  property 
failed  to  realize  enough  to  reimburse  him  for  the  pay- 
ment of  the  debt,  he  would  lose  this  deficiency  unless 
the  grantee  had  assumed  and  agreed  to  pay  the  mort- 
gage. Whether  the  mortgagee  may  sue  directly  a 
grantee  of  mortgaged  premises  who  has  assumed  and 
agreed  to  pay  the  mortgage,  is  a  question  which  has 
been  much  litigated ;  but  it  is  now  held  almost  every- 
where that  the  mortgagee  may  do  so.  Sometimes  a 
succession  of  grantees,  each  in  turn  on  buying  the 
premises,  assumes  and  agrees  to  pay  a  certain  mort- 
gage. The  mortgagee,  in  such  a  case,  is  generally  al- 
lowed to  recover  from  any  one  of  these  grantees  so 
far  as  is  necessary  to  satisfy  his  claim;  but  the  ulti- 
mate liability  will  rest  upon  the  last  purchaser  who 
has  assumed  the  debt.  As  against  a  grantee  who  has 
not  assumed  the  debt,  the  mortgagee  has  no  rights. 


316  COMMERCIAL    LAW 

He  can  deprive  such  a  purchaser  of  his  land,  so  far  as 
is  necessary  to  collect  the  debt,  but  he  cannot  hold  him 
personally  liable. 

FORECLOSURE  OF  REAL  ESTATE  MORT- 
GAGES. — According  to  the  original  theory  of  the 
law,  the  mortgagee  became  the  absolute  owner  of 
the  mortgaged  premises  by  the  failure  of  the  mort- 
gagor to  pay  the  debt  when  due,  and  by  the  foreclo- 
sure or  termination  of  the  mortgagor's  right  of  re- 
demption. Foreclosure  of  this  character  is  still  possible 
in  a  few  States,  but  in  most  States  it  has  been  wholly 
abolished,  and  everywhere  the  ordinary  method  of 
foreclosure  is  by  sale  of  the  mortgaged  property.  Fre- 
quently the  sale  is  made  by  virtue  of  an  authority  or 
power  of  sale  given  in  the  mortgage  itself,  but  some- 
times it  is  made  under  authority  of  a  decree  of  court 
in  foreclosure  proceedings.  Where  a  mortgage  con- 
tains a  power  to  the  mortgagee  to  sell  on  default  of 
the  mortgagor,  he  is  acting  not  simply  on  his  own 
behalf  but  as  agent  for  the  mortgagor  in  transferring 
title  to  the  property.  The  proceeds  will  be  applied 
first  to  the  payment  of  the  debt  with  interest  and  the 
expenses  of  the  sale.  Any  surplus  will  be  held  by  the 
mortgagee  in  trust  for  the  mortgagor  and  must  be 
paid  over  to  the  latter.  The  situation  is  entirely  an- 
alogous to  that  created  by  a  collateral  note  where 
stock  or  other  personal  property  is  transferred  as  col- 
lateral to  secure  a  debt.  The  statutes  of  all  States 
contain  regulations  in  regard  to  the  foreclosure  of 
mortgages,  which  must  be  observed.  They  are  aimed 
generally  to  protect  the  mortgagor  from  forfeiture  of 


COMMERCIAL    LAW  317 

his  property  to  any  greater  extent  than  is  necessary 
to  insure  the  payment  of  the  mortgage  debt.  In  any 
case  of  foreclosure  the  local  statute  and  practice  must 
be  consulted. 

DEEDS  OF  TRUST.— In  some  States  what  are 
called  deeds  of  trust  have  been  largely  substituted  for 
mortgages.  The  temptation  to  make  such  a  substitu- 
tion is  greatest  in  jurisdictions  which  refuse  to  recog- 
nize the  mortgagee  as  the  legal  owner  of  the  premises. 
If  the  law  denies  the  mortgagee  this  recognition,  he 
can,  by  insisting,  as  a  condition  of  his  loan,  that  the 
premises  shall  be  conveyed  to  a  third  person  as 
trustee,  achieve  the  result  that  the  mortgagor  at  least 
is  no  longer  the  legal  owner  of  the  premises.  Essen- 
tially the  situation  is  the  same  under  a  deed  of  trust  as 
under  a  common  law  mortgage.  In  both  cases  the 
legal  title  is  held  merely  to  secure  the  debt,  and  the 
court  will  secure  to  the  debtor  all  the  value  of  the 
property  which  can  be  realized  from  its  sale  over  and 
above  the  amount  of  the  debt.  If  the  debt  is  paid  of 
course  the  debtor  is  entitled  to  the  return  of  the  se- 
curity whether  it  is  real  estate  or  personalty,  and 
whether  held  directly  by  the  creditor  or  by  a  third 
person  as  trustee. 

THE  TORRENS  LAW.— The  Torrens  system 
of  registration  of  land  titles  received  its  name  from 
Sir  Robert  Torrens  who  drew  the  first  Torrens  law 
enacted  in  South  Australia  in  1858.  The  practice  of 
searching  titles  has  gone  through  this  development. 
In  country  districts  the  person  purchasing  real  estate 
frequently  accepted  the  grantor's  deed  without  any 


318  COMMERCIAL    LAW 

search  of  the  title.  Of  course,  if  there  were  judgments 
against  the  grantor,  or  other  claims  against  the  real 
property,  the  purchaser  or  the  grantee  takes  the  prop- 
erty subject  to  these  claims.  Ordinarily,  however, 
the  careful  purchaser  employs  a  lawyer  to  make  a 
search  of  the  title  before  he  accepts  it  and  pays  the 
purchase  price.  In  New  York  City  to-day,  and  in 
some  of  the  other  large  cities  of  the  country,  most  of 
the  title  searching  has  passed  out  of  the  hands  of  the 
lawyers  into  the  hands  of  the  title  companies.  The 
title  company  makes  the  search  now,  the  same  as  the 
lawyer  formerly  did,  with  an  added  advantage.  Sup- 
pose I  am  to  buy  Blackacre,  and  employ  attorney 
Blackstone  to  search  the  title.  He  reports  it  as  being 
free  and  clear.  I  take  possession  and  pay  the  purchase 
price.  Six  months  later  the  wife  of  the  grantor  ap- 
pears on  the  scene.  When  the  grantor  conveyed,  he 
stated  in  the  deed  that  he  v/as  single.  The  wife  es- 
tablishes the  validity  of  her  marriage,  and  her  hus- 
band's, my  grantor's,  death.  She  is,  of  course,  entitled 
to  dower.  I  am  obliged  to  make  some  kind  of  settle- 
ment with  her,  and  there  is  no  way,  probably,  by 
which  I  can  hold  my  lawyer  for  failing  to  find  that  the 
grantor  v/as  married,  when  he  made  the  search  for 
me.  If  the  title  to  my  property  had  been  searched 
for  me  by  a  title  company,  it  would  have  issued  a  title 
insurance  policy  in  my  name  which  would  have  pro- 
tected me,  in  this  instance,  and  I  would  have  been  re- 
imbursed by  the  title  company  for  the  loss  which  I 
sustained  in  having  to  pay  the  dower  claim  of  my 
grantor's  wife. 


COMMERCIAL    LAW  319 

ECONOMY  OF  TITLE  SEARCHES.— Econ- 
omically, the  title  company  is  a  big  step  in  advance 
of  the  former  practice  of  having  lawyers  make  a 
search.  The  title  company  can  do  it  much  cheaper. 
If  Blackacre  was  sold,  when  lawyers  alone  were  mak- 
ing searches,  probably  a  different  lawyer  v/ould  be 
employed  at  each  sale,  and  he  would  make  a  search 
back  to  the  earliest  deed.  After  a  title  company  has 
made  its  search,  the  result  is  in  its  records  and  the 
next  time  it  is  on  the  same  piece  of  property,  the 
search  would  simply  be  what  is  called  a  continuation, 
which  would  carry  the  search  from  the  last  time  the 
company  was  on  the  title  down  to  the  present  time. 
This  enables  the  title  company  to  make  its  fee  more 
reasonable  than  the  lawyer,  and  v/e  can  now  secure  a 
title  company's  search  and  insurance  policy  fre- 
quently for  less  than  formerly  was  paid  to  the  lawyer 
for  the  search  alone. 

ESCHEAT. — However,  the  policies  issued  by 
the  title  companies  are  not  absolutely  satisfactory, 
and  the  next,  and  perhaps  final,  step  is  for  the  State  to 
come  in  and  guarantee  the  title.  This  is  perfectly 
logical.  The  ownership  of  all  land  is  in  the  State, 
theoretically,  the  same  as  under  the  English  common 
law.  The  King,  in  those  days,  owned  all  the  land. 
This  is  more  than  theory,  even  to-day.  If  a  man  dies, 
leaving  no  heirs  and  no  will,  his  real  property  escheats 
to  the  State,  this  being  based  simply  on  the  theory 
that  the  property  goes  back  to  its  original  owner,  the 
State.  If  this  is  true,  why  should  not  the  State  insure 
the  title?    This  is  the  theory  of  the  Torrens'  system. 


320  COMMERCIAL    LAW 

EFFECT  OF  TORRENS  LAW.— The  first 
Torrens  law,  enacted  in  this  country,  was  in  Illinois, 
and  similar  acts  have  been  passed  in  a  number  of  the 
States,  including  New  York.  When  such  laws  are  on 
the  statute  books,  generally  the  business  of  a  title 
company  will  be  legislated  out  of  existence.  For  that 
reason,  opposition  to  the  passage  of  such  laws  has 
developed  in  some  States.  Perhaps  the  next  fifty 
years  may  see  them  generally  adopted  throughout  the 
country. 


CHAPTER  X 


Estates  and  Trusts 

ESTATES. — When  a  person  who  ov/ns  property 
dies,  the  first  question  which  arises  is  as  to  what 
becomes  of  his  estate;  who  pays  the  bills,  who 
takes  charge  of  his  business  affairs,  and  what  are  the 
rules  as  to  the  division  of  his  property.  The  first  ques- 
tion a  lawyer  always  asks  is,  *'Did  the  deceased  die 
testate  or  intestate?"  that  is,  did  he  leave  a  will  or  not. 
If  he  left  a  will,  probably  he  has  named  one  or  more 
executors  in  his  will  to  settle  his  estate,  in  which  case 
such  person  or  persons  will  take  charge.  If  he  has 
not  appointed  an  executor  in  his  will,  an  oversight 
which  rarely  occurs,  the  probate  court  will  appoint 
an  administrator.  If,  on  the  other  hand,  the  man  died 
intestate,  it  will  be  absolutely  necessary  for  the  court 
to  appoint  an  administrator.  The  executor  will  settle 
up  the  estate  according  to  the  directions  contained  in 
the  will,  but  if  no  will  was  made,  the  administrator 
will  settle  up  the  estate  according  to  the  rules  of  the 
probate  court,  under  which  he  is  acting,  and  the  prop- 
erty will  be  divided  in  accordance  with  the  statutes  of 
the  State  or  States  having  jurisdiction  over  the  es- 
tate. 

CHARACTER  OF  PROPERTY.— It  is  very 
essential  to  distinguish  carefully  between  the  two 
kinds  of  property,  real  and  personal,  which  the  de- 
ceased leaves.  Real  property,  as  we  have  explained, 
consists  of  land  with  the  buildings  permanently  at- 

321 


322  COMMERCIAL    LAW 

tached  to  it,  and  all  other  property  is  personal  prop- 
erty, although  it  may  relate  to  real  property.  Thus,  a 
mortgage  on  land  is  personal  property,  also  the  shares 
of  stock  in  a  corporation,  although  the  corporation 
may  be  organized  to  engage  exclusively  in  the  owner- 
ship of  real  property,  is  personal  property.  Where  a 
person  dies  leaving  a  will,  his  real  property  goes 
directly  to  the  persons  to  whom  he  leaves  it  in  the 
will.  In  the  case  where  he  dies  intestate,  his  real  prop- 
erty passes  directly  to  his  heirs  at  law,  who  are  desig- 
nated by  statute.  In  neither  case  is  any  formality 
necessary,  beyond  the  probate  of  the  will,  to  vest  the 
devisee  of  the  testator  or  the  heirs  at  law  of  the  in- 
testate with  the  title  to  the  real  property.  The  situa- 
tion in  regard  to  personal  property  is  quite  different. 
Where  the  deceased  died  leaving  a  will,  his  executor 
immediately  has  title  to  all  the  personal  property.  If 
he  dies  intestate,  the  administrator  will  take  title  as 
soon  as  appointed.  The  personal  property  is  used  by 
the  executor  or  administrator  to  pay  debts,  and  the 
real  property,  whether  a  man  dies  testate  or  intestate, 
is  never  used  to  pay  debts  unless  the  personal  prop- 
erty is  insufficient. 

WILLS  DEFINED.— The  definition  of  Jarman 
is  commonly  used  in  defining  a  will :  "A  will  is  the  in- 
strument by  which  a  person  makes  a  disposition  of  his 
property  to  take  effect  after  his  decease,  and  which  is, 
in  its  own  nature,  ambulatory,  and  revocable  during 
his  life."  This  definition  is  open  to  one  criticism.  It 
does  not  include  oral  wills  which,  as  we  shall  see,  are 
sometimes  legal.    We  shall  also  use  other  terms  in 


COMMERCIAL    LAW  323 

this  chapter  which  must  be  defined.  A  testator  is  the 
man  who  makes  the  will,  while  the  testatrix  is  a 
woman  making  a  will.  A  codicil  is  a  supplement  to  a 
will,  made  and  executed  with  the  same  formality  as 
the  original  will,  and  it  becomes  a  part  of  the  original 
will,  adding  to  it,  or  altering  it,  as  the  case  may  be. 
A  devisee  is  a  person  who  takes  real  property  under  a 
will,  while  a  legatee  takes  personal  property  under  a 
will,  and  the  real  property  passing  under  the  will  is 
called  a  devise,  and  the  personal  property  a  bequest. 
A  legacy  refers  to  money  passing  under  a  will.  This 
is  why  the  ordinary  will  uses  this  phrase:  "I  give, 
devise,  and  bequeath."  It  is  not  fatal,  however,  to 
make  a  mistake  of  having  the  will  read,  "I  hereby 
devise,"  referring  to  personal  property.  It  is  more  a 
mistake  in  the  use  of  English,  than  a  mistake  in  law  to 
make  a  wrong  choice  of  these  terms  which  we  have 
just  defined.  A  holographic  or  olographic  will  is  a 
will  v/hich  is  wholly  written  in  the  testator's  or  testa- 
trix's own  hand.  The  statutes  of  a  few  States  recog- 
nize these  wills  as  valid  without  the  formal  execution 
or  attestation  if  they  are  wholly  written,  signed,  and 
sealed  by  the  testator's  own  hand.  A  nuncupative  will 
is  an  oral  will.  While  most  wills  must  be  in  writing, 
in  many  jurisdictions  the  oral  wills  made  by  sailors 
at  sea,  and  soldiers  in  actual  service  are  recognized  as 
valid  without  being  reduced  to  writing  and  without 
any  specified  number  of  witnesses.  It  is  perfectly  ap- 
parent why  these  exceptions  are  made,  because  of  the 
difficulty  of  securing  the  materials  with  which  to 
make  a  written  will  by  these  two  classes  of  people. 


324  COMMERCIAL    LAW 

Nuncupative  wills  are  good  only  to  dispose  of  personal 
property,  unless  a  special  statute  has  been  enacted 
which  provides  otherwise,  but  this  is  not  commonly 
done. 

A  WILL  AND  A  GIFT  CAUSA  MORTIS  DIS- 
TINGUISHED.—We  have  already  referred  to  gifts 
causa  mortis  which  are  gifts  of  personal  property 
made  by  the  donor  under  apprehension  of  immediate 
death,  coupled  with  the  delivery  of  the  property.  The 
gift  is  defeated  by  the  recovery  of  the  donor.  A  gift 
causa  mortis,  may  be  made  orally,  while,  with  the  ex- 
ception of  nuncupative  wills,  all  wills  must  be  in  writ- 
ing. A  gift  causa  mortis  must  be  made  under  fear  of 
pending  death,  whereas  a  will  is  ordinarily  made  with 
a  view  of  the  fact  of  death  but  not  of  its  immediate 
happening.  Again,  delivery  is  necessary  to  make  a 
gift  causa  mortis,  whereas  under  a  will  delivery  never 
takes  effect  until  after  the  person  dies,  and  then  the 
legatee's  title  comes  through  the  executor  or  admin- 
istrator, and  not  directly  from  the  testator.  Real 
property  is  not  the  subject  of  a  gift  causa  mortis, 
whereas  a  will  may  dispose  of  both  real  and  personal 
property. 

WHO  MAY  MAKE  A  WILL.— As  a  general 
rule,  any  person  of  sound  mind  and  of  the  age  of 
twenty-one  years  may  make  a  will.  In. some  States,  a 
person  eighteen  years  of  age  may  make  a  will  of  per- 
sonal property.  Formerly  a  married  woman  could  not 
make  a  valid  will  excepting  in  a  few  instances,  but  to- 
day, by  statute,  this  common  law  disability  has  been 
either  wholly  or  largely  removed.    The  statutes  of  the 


COMMERCIAL   LAW  325 

particular  State  in  which  the  married  woman  resides, 
or  in  which  her  property  is  situated  should  always  be 
consulted. 

TESTAMENTARY  CAPACITY.— Another 
qualification  is  that  the  testator  must  have  sufficient 
intellectual  powers  to  enable  him  to  be  said  to  have 
"a  sound  and  disposing  mind,  memory,  and  under- 
standing." The  case  of  Whitney  v.  Twombly,  136 
Mass.  145,  gives  us  as  good  a  general  statement  as 
there  is  concerning  the  nature  of  testamentary  capac- 
ity: "A  testator  has  a  sound  mind  for  testamentary 
purposes,  only  when  he  can  understand  and  carry  in 
mind,  in  a  general  way,  the  nature  and  situation  of 
his  property,  and  his  relations  to  the  persons  around 
him,  to  those  who  naturally  have  some  claim  to  his 
remembrance,  and  to  those  in  whom,  and  the  things 
in  which,  he  has  been  chiefly  interested.  He  must 
understand  the  act  which  he  is  doing,  the  disposition 
which  he  wishes  to  make  of  his  property,  and  the 
relation  in  which  he  stands  to  the  objects  of  his  bounty 
and  to  those  who  ought  to  be  in  his  mind  on  the  oc- 
casion of  making  his  will."  The  ability  to  make  a 
will  is  not  necessarily  gone  because  the  testator  is  old, 
weak  or  ill,  even  practically  at  the  point  of  death.  The 
physical  condition  is  simply  significant  in  determining 
the  mental  condition,  but  of  course  a  very  weak  physi- 
cal condition  does  not  necessarily  mean  a  weak  intel- 
lectual condition.  Insane  persons  are  not  capable  of 
making  wills,  but  a  person  who  is  insane  may  still 
have  a  "lucid  interval"  during  which  time  he  is  suffi- 
ciently restored  to  his  normal  condition  to  enable  him 


326  COMMERCIAL    LAW 

to  act  with  such  reason  as  to  make  a  valid  will,  al- 
though he  may,  very  soon,  relapse  into  his  former 
insane  condition.  Ordinarily  most  peculiarities  and 
eccentricities  on  the  part  of  the  testator  do  not  affect 
his  ability  to  make  a  will ;  neither  do  peculiar  religious 
beliefs  have  any  effect  unless,  in  any  of  these  cases, 
the  person's  mind  is  so  completely  controlled  as  to 
prevent  the  exercise  of  rational  judgment  in  dispos- 
ing of  his  property.  His  eccentricities  must  amount 
almost,  in  such  cases,  to  a  form  of  insanity  to  have  this 
effect. 

HOW  A  WILL  MUST  BE  EXECUTED.— 
There  are  four  requirements  for  the  execution  of  a 
valid  will: 

(1)  It  must  be  in  writing. 

(2)  It  must  be  signed  by  the  testator. 

(3)  The  testator's  signature  must  be  made  by  the 
testator  or  the  marking  acknowledged  by  him  in  the 
presence  of  the  necessary  number  of  witnesses. 

(4)  It  must  be  declared  by  the  testator  to  be  his 
last  will  in  the  presence  of  the  necessary  number  of 
witnesses,  who  are  present  at  the  same  time  and  who 
subscribe  their  names  as  witnesses  in  the  presence  of 
the  testator. 

OTHER  FORMALITIES.— No  particular  form 
of  writing  is  necessary.  Probably  typing  is  the  most 
common  form  in  use  to-day.  As  a  precaution,  lawyers 
sometimes  have  the  testator  sign  at  the  bottom  of  each 
typewritten  page,  where  the  will  is  of  several  pages, 
or  the  document  is  fastened  together  with  silk,  the 
two  ends  of  which  are  carried  to  the  last  page  and  im- 


COMMERCIAL    LAW  327 

bedded  in  a  wax  seal.  The  testator  should  sign  the 
wiH'himself  unless  he  is  unable  to,  from  lack  of  educa- 
tion or  feebleness,  in  which  case,  the  statute  generally 
makes  provision  for  another  form  of  signing.  It  is 
better  practice  for  the  testator  to  sign  the  will  in  the 
presence  of  his  witnesses,  acknowledge  the  signature, 
and  then  the  testator  should  declare,  in  the  presence 
of  his  witnesses,  that  this  is  his  last  will  and  testament. 
In  many  States,  two  witnesses  are  all  that  are  neces- 
sary; a  few  States  require  three.  Careful  practice 
generally  calls  for  three. 

ILLUSTRATION.— A  testator  lives  in  New 
York.  He  has  two  witnesses  to  his  will.  His  will  is  valid 
as  far  as  his  real  property  in  that  State  is  concerned,  but 
should  it  happen  that  he  also  owns  real  property  in  a 
State  where  three  witnesses  are  required,  his  will 
would  not  pass  title  to  the  real  property  in  that  State 
and,  as  far  as  that  State  is  concerned,  he  would  die  in- 
testate, and  that  real  property  would  descend  to  his 
heirs  in  accordance  with  the  laws  of  that  State,  which 
would  quite  likely  not  be  what  the  testator  intended  to 
happen.  By  having  three  witnesses,  his  will  is  just  as 
good  in  New  York,  where  only  two  are  necessary  and 
the  presence  of  the  third  witness  makes  the  will  good, 
and  passes  the  real  property  situated  in  the  State 
where  three  are  required.  It  is  always  best  to  have 
the  witnesses  add  their  addresses  to  their  signatures. 
This  is  not  required  by  statute  in  many  States,  but 
after  a  person's  decease,  it  may  help  in  locating  the 
witnesses  by  having  addresses  to  which  to  refer.  It 
is,  of  course,  wise  to  use  some  care  in  the  selection  of 


328  COMMERCIAL    LAW 

witnesses,  although  almost  any  person  is  competent. 
Adults,  of  course,  are  preferable  as  witnesses,  but  an 
infant  is  a  perfectly  good  witness,  but  he  should  pos- 
sess sufficient  intelligence  to  be  able  to  appreciate  the 
importance  of  the  act  he  is  witnessing.  In  view  of  the 
formalities  to  be  observed  in  the  execution  of  a  will, 
and  the  technical  niceties  in  the  use  of  the  proper  word 
or  phrase,  often  required  to  insure  the  expression  of 
the  testator's  exact  intention,  the  drafting  of  a  will 
should  never  be  left  to  a  layman,  but  should  always  be 
entrusted  to  a  lawyer. 

THE  FORM  OF  A  WILL.— -In  our  discussion 
it  is  well  to  keep  in  mind  the  form  of  a  will.  A  simple 
will  reads  as  follows : 

IN  THE  NAME  OF  GOD,  AMEN: 

I,  John  Jones,  of  the  Borough  of  Manhattan,  City 
and  State  of  New  York,  being  of  sound  and  disposing 
mind  and  understanding,  do  make,  publish,  and  de- 
clare this  my  last  will  and  testament,  as  follows: 

First.  I  direct  that  all  of  my  just  debts  and  my 
funeral  expenses  be  paid  as  soon  after  my  death  as 
conveniently  may  be. 

Second.  I  give,  devise  and  bequeath  all  the  rest, 
residue  and  remainder  of  my  estate,  whether  real, 
personal,  or  mixed,  of  whatsoever  kind,  character  or 
description,  and  wheresoever  situated,  unto  my  wife, 
Emma  Jones,  for  and  during  the  period  of  her  natural 
life. 

Third.  Upon  the  death  of  my  said  wife  Emma,  I 
give,  devise  and  bequeath  the  said  residue  and  re- 
mainder of  my  estate  to  my  childen,  Alice  Jones, 


COMMERCIAL    LAW  329 

Sarah  Jones,  and  George  Jones,  to  them,  their  heirs, 
executors,  administrators  and  assigns  forever,  share 
and  share  alike,  per  stirpes  and  not  per  capita. 

Fourth.  This  will  shall  remain  in  full  force  and 
effect  notwithstanding  children  may  hereafter  be  bom 
to  me. 

Fifth.  I  nominate,  constitute,  and  appoint  my 
said  wife  Emma,  and  the  Institute  Trust  Company, 
executors  of  this  my  last  will,  giving  to  them  full 
power  and  authority  to  sell  and  convey  any  and  all 
real  estate,  whereof  I  may  die  seized,  at  such  times  and 
for  such  prices  as  they  may  consider  for  the  best  inter- 
ests of  my  estate. 

Sixth.  I  hereby  revoke  any  and  all  wills  at  any 
time  by  me  heretofore  made. 

IN  WITNESS  WHEREOF,  I  have  hereunto  set 
my  hand  and  seal  this  first  day  of  July,  1921. 

(Signed)     JOHN  JONES  (L.  S.). 

Signed,  sealed,  published  and  declared  by  John 
Jones,  the  above-named  testator,  as  and  for  his  Last 
Will  and  Testament,  in  the  presence  of  us,  and  each 
of  us,  and  at  the  same  time  declared  by  him  to  us,  and 
each  of  us,  to  be  his  Last  Will  and  Testament,  and 
thereupon  we,  at  his  request,  and  in  his  presence  and 
in  the  presence  of  each  other,  have  hereunto  sub- 
scribed our  names  as  witnesses,  this  first  day  of  July, 
1921. 

RALPH  ROE,  3921  Broadway,  New  York,  N.  Y. 

JOHN  DOE,  65  Fifth  Avenue,  New  York,  N.  Y. 

JAMES  SMITH,  130  Post  Avenue,  New  York, 
N.  Y. 


S30  COMMERCIAL    LAW 

REVOCATION.-— A  will  may  be  revoked  at  any 
time  at  the  pleasure  of  the  testator.  The  ordinary 
ways  of  accomplishing  a  revocation  of  a  will  are: 
(1)  The  testator  executes  a  later  will,  and  in  express 
terms  says,  **I  hereby  revoke  all  former  wills  by  me 
made."  Even  if  such  an  expression  is  not  put  in  the 
second  will,  if  its  terms  are  wholly  inconsistent  with 
the  former  will,  this  in  itself,  will  act  as  a  revocation. 
Again,  a  will  may  be  revoked  by  mutilation,  as  by  be- 
ing burned,  torn,  or  otherwise  mutilated  by  the  testa- 
tor himself,  or  in  his  presence  and  by  his  direction. 
The  mutilation  of  the  will,  however,  if  not  accom- 
panied by  an  intent  thereby  to  revoke  it,  is  of  no  effect. 
I  think  I  am  tearing  up  an  old  insurance  policy,  but 
because  of  poor  eye-sight,  discover  later  that  I  have 
torn  my  will.  This  would  not  amount  to  a  revoca- 
tion of  the  will.  As  has  been  said  by  a  writer  on  the 
subject  of  wills,  "No  amount  of  cancellation  or  de- 
struction without  the  intent  to  revoke,  and  no  amount 
of  intent  without  the  actual  destruction,  will  suffice 
to  revoke  a  will.  Both  the  intent  and  the  actual  de- 
struction or  cancellation  must  coexist." 

Sometimes  changes  in  the  circumstances  and  con- 
ditions of  the  testator's  life  will  work  a  revocation. 
For  example,  at  common  law,  the  marriage  of  a 
woman  worked  an  absolute  revocation  of  her  will. 
This  has  now  been  changed  in  most  States  by  statute. 
In  a  great  many  States,  however,  today,  if  a  testator, 
having  no  children,  should  make  his  will,  and  after 
the  execution  of  the  will,  a  child  is  born,  the  will  is 
revoked  in    toto,  when  no  provision  for  such  child  is 


COMMERCIAL    LAW  331 

made  in  the  will.  However,  as  above  stated,  this  rule 
is  not  uniform  in  all  States,  and  local  statutes  should 
therefore  be  consulted  on  this  point.  Where  a  testa- 
tor already  has  children,  the  birth  of  additional  chil- 
dren will  not  affect  his  will  except,  that  such  after- 
born  children  will  inherit  the  same  as  though  he  had 
left  no  will.  These  rules  in  regard  to  after-born 
children  apply  only  where  the  will  does  not  make  any 
mention  of  possible  issue,  and  for  this  reason  it  is  well 
to  insert  the  clause,  in  many  jurisdictions,  providing 
that  the  will  shall  remain  in  full  force  and  effect  not- 
withstanding the  fact  that  children  may  thereafter  be 
born  to  the  testator. 

PROBATE  OF  WILLS.— Every  State  has  a 
probate  court  for  the  settlement  of  decedents'  estates. 
Such  a  court  is  variously  named  as  the  probate  court, 
the  surrogate's  court,  and  the  like,  according  to  the 
nomenclature  adopted  in  a  particular  State.  Before 
an  executor  named  in  a  will  has  any  authority  to  act, 
he  must  produce  the  will,  and  after  the  proper  pro- 
ceeding has  been  had,  the  will  is  admitted  to  probate, 
and  he  may  then  qualify  under  it  by  giving  the  neces- 
sary bond.  If  the  deceased  died  intestate,  the  proper 
person  will  apply  to  the  probate  court  for  the  ap- 
pointment of  an  administrator,  and  after  a  hearing, 
the  court  will  appoint  the  person  entitled  to  receive 
letters  of  administration.  The  administrator  will 
then  qualify,  give  the  necessary  bond,  and  then  pro- 
ceed with  the  settling  of  the  estate. 

A  testator  may  name  anyone  in  his  will  as  an  exec- 
utor.    In  the  large  cities,  in  recent  years,  it  is  be- 


332  COMMERCIAL   LAW 

coming  quite  common  to  name  a  trust  company  as 
executor,  because  its  facilities  for  handling  estates 
render  it  more  efficient  than  the  average  individual. 
If,  on  the  other  hand,  the  testator  is  unwilling  to 
place  the  sole  care  of  his  estate  in  the  hands  of  a 
trust  company,  he  may  name  two  executors,  a  trust 
company  and  his  wife,  if  he  is  a  married  man,  or  a 
very  close  friend  in  whose  judgment  he  has  great  con- 
fidence, and,  together,  the  two  act  as  executors.  The 
fees  which  the  executors  receive  are  generally  fixed 
by  statute.  If  the  deceased  dies  intestate,  the  letters 
of  administration  are  granted  by  the  court  in  accord- 
ance with  a  definite  statute.  While  the  law  in  the  vari- 
ous States  is  not  uniform,  generally,  the  priority  of 
the  right  to  administration  is  arranged  by  statute 
something  like  this : 

(1)  On  the  estate  of  a  husband: 

(a)  To  the  widow,  if  there  is  any. 

(b)  If  there  is  no  widow,  or  if  the  widow  re- 
nounces, then  to  the  children. 

(c)  If  there  are  no  children,  then  to  the  is- 
sue of  deceased  children. 

(d)  If  no  issue  of  deceased  children,  then  to 
the  nearest  of  kin. 

(2)  On  the  estate  of  a  wife: 

(a)  To  the  husband,  who  has  an  absolute 
right.  If  the  husband  for  any  reason  does  not 
desire  to  act  as  such  administrator,  he  may 
select  any  fit  person  to  administer  the  estate. 

(b)  If  there  is  no  husband,  then  to  the  chil- 
dren. 


COMMERCIAL    LAW  333 

(c)  If  no  children,  then  to  the  issue  of 
deceased  children. 

(d)  If  no  issue  of  deceased  children,  then  to 
the  nearest  of  kin. 

(3)  On  the  estate  of  an  unmarried  child: 

(a)  To  the  father,  who  has  an  absolute 
right.  If  for  any  reason  the  father  does  not 
wish  to  act,  the  court  may  select  any  fit  person 
to  administer  the  estate. 

(b)  If  there  is  no  father,  then  to  the  mother 
and  brothers  and  sisters,  whether  of  whole  or 
half  blood. 

(c)  If  no  mother  or  brothers  or  sisters,  then 
to  the  nearest  of  kin  in  equal  degree. 

PER  STIRPES  AND  PER  CAPITA.— Where 
the  subject  of  a  testamentary  disposition  is  directed 
to  be  "equally  divided"  or  to  be  divided  "share  and 
share  alike,"  or  where  similar  words  are  used  which 
indicate  an  equal  division  among  a  class  of  persons,  the 
persons  among  whom  the  division  is  to  be  made  take 
per  capita,  unless  a  contrary  intention  is  discoverable 
from  the  will.  Where  the  individuals  of  a  class  are 
specifically  named,  or  are  designated  by  their  rela- 
tion to  some  ancestor  living  at  the  date  of  the  will, 
whether  the  testator  or  another,  they  take  per  capita, 
unless  the  context  of  the  will  shows  an  intention  that 
they  should  take  per  stirpes.  But  where  the  gift  is 
to  an  individual,  or  several  named  individuals,  and  to 
others  as  a  class,  the  latter  take  per  stirpes ;  unless  the 
testator  uses  language  indicating  an  intention  that 
the  members  of  the  class  shall  share  equally  with  the 


334  COMMERCIAL    LAW 

named  individuals.  A  gift  to  a  class  of  persons  or  on 
their  death  to  their  heirs  or  children  will  be  distributed 
among  such  heirs  or  children  per  stirpes;  but  a  gift  to 
one  person  and  the  children  of  other  deceased  persons 
will  be  divided  per  capita,  unless  it  appears  from  the 
context  or  circumstances  shown  by  extraneous  evi- 
dence that  the  testator  intended  a  distribution  per 
stirpes. 

ILLUSTRATION.— A  gift  to  children  of  testa- 
tor, A.  B.  and  C,  or  on  their  death  to  their  heirs  or 
children  will  be  distributed,  in  the  event  of  the  death 
of  C.  before  the  testator,  among  heirs  or  children 
of  C.  per  stirpes.  (In  other  words,  they  will  divide 
the  share  of  their  father  between  them.)  But  a  gift 
to  A.  and  to  X.  Y.  and  Z.,  the  children  of  B.  deceased, 
will  be  divided  per  capita. 

THE  CONSTRUCTION  OF  WILLS.— It 
sometimes  happens  that  wills  are  not  carefully  drawn, 
and  even  if  they  are,  their  meaning  is  not  always  per- 
fectly clear.  Ordinarily,  and  person  who  is  interest- 
ed in  the  meaning  of  a  clause  of  a  will  may  bring  a 
suit  in  the  proper  court  asking  for  a  construction  of 
the  will.  Of  course,  each  case  is  governed  more  or 
less,  by  its  own  facts,  but  there  are  certain  general 
rules  which  the  courts  follow  in  trying  to  arrive  at 
the  testator's  intent.  For  example,  a  will  is  ordi- 
narily presumed  to  speak  as  of  the  time  of  the  testa- 
tor's death.  Thus,  reference  in  a  will,  to  the  arrival 
of  the  testator's  youngest  child  at  the  age  of  twenty- 
five  years,  will  apply  to  the  youngest  child  at  the  time 
of  the  testator's  death,  although  such  child  is  born 


COMMERCIAL    LAW  335 

after  the  execution  of  the  will.  Ordinarily,  a  testa- 
tor is  presumed  to  have  intended  to  dispose  of  all  of 
his  property,  and  if  a  will  can  be  so  construed,  this 
will  be  done,  rather  than  to  adopt  a  construction 
which  will  make  him  testate  as  to  part  of  his  property 
and  intestate  as  to  another  part.  If  there  are  two 
irreconcilable  parts,  the  latter  part  is  the  one  which 
prevails.  Words  are  to  be  understood  in  their  ordi- 
nary meaning,  unless  there  is  something  to  clearly 
show  contrary  intent.  If,  between  two  possible  con- 
structions, one  of  which  would  disclose  a  legal  pur- 
pose, and  the  other  an  illegal  purpose,  the  court  will 
adopt  the  former. 

DOWER. — Under  the  rules  of  the  common  law, 
a  wife  was  entitled,  on  the  death  of  her  husband,  to  an 
estate  for  life  in  one-third  of  the  lands  of  which  her 
husband  was  seized  of  an  estate  of  inheritance  at  any 
time  during  the  marriage.  This  dower  right  still 
exists  in  most  States,  although  it  may  differ  in  some 
particulars.  For  example,  in  Connecticut,  a  dower 
right  exists  only  in  the  real  property  which  the  hus- 
band owns  at  the  time  of  his  death,  and  not,  as  at 
common  law,  in  all  the  real  property  of  which  he  was 
seized  during  the  whole  marriage.  Therefore, 
reference  to  the  statutes  must  be  made  in  each  State, 
to  know  the  exact  rule  in  a  particular  jurisdiction. 
Where  the  State  adheres  closely  to  the  common  law, 
this  right,  on  the  part  of  the  wife,  is  a  right  of  which 
her  husband  cannot  deprive  her;  if  the  husband  dis- 
poses of  all  his  real  property  in  his  will  to  his  friend, 
John  Jones,  such  disposition  is  not  valid  and  the  wife 


336  COMMERCIAL    LAW 

would  still  be  allowed  her  dower  right  by  the  probate 
court.  It  must  also  be  borne  in  mind  that  dower 
refers  only  to  real  property.  Generally,  a  husband 
may  dispose  of  his  personal  property  without  any 
reference  to  his  wife.  Ordinarily,  two  things  are 
necessary  to  establish  the  right  of  dower:  (1)  A 
legal  marriage,  and  (2)  seizin  by  the  husband  of  an 
estate  of  inheritance  in  lands,  or,  in  a  layman's  terms, 
the  absolute  ownership  of  a  piece  of  real  estate. 

CURTESY.— Curtesy  is  the  common  law  right 
which  a  husband  has  in  the  real  property  of  his  wife, 
and  by  it  he  is  entitled  to  an  estate  for  his  life  in  all 
lands  of  which  his  wife  was  seized  during  marriage. 
Needless  to  say,  women  did  not  take  part  in  law  mak- 
ing when  this  law  arose.  To  establish  this  right, 
three  things  are  necessary:  The  two  already  men- 
tioned in  dower,  and  third,  the  birth  alive  of  issue  of 
the  marriage.  The  right  of  curtesy  does  not  exist 
in  this  common  law  form  in  as  many  States  as  does 
the  right  of  dower.  Where  these  two  rights  do  exist, 
in  their  more  or  less  modified  form,  you  have  the  ex- 
planation of  the  fact  that  when  a  married  man  sells 
real  property,  his  wife  joins  in  the  deed,  or  when  a 
married  woman  sells  real  property,  her  husband  joins 
in  the  deed.  The  act  of  either  in  joining,  releases  the 
dower  or  curtesy  right  and  allows  the  purchaser  to 
get  a  clear  title. 

CONFLICT  OF  LAWS.— We  have  already  re- 
ferred to  this  topic.  It  frequently  happens  that  a 
person  dies  owning  real  property  located  in  a  number 
of  States.     It  is  almost  certain  that  the  laws  covering 


COMMERCIAL    LAW  337 

real  property  will  vary  in  these  different  States.  If 
he  was  a  resident  of  Philadelphia,  his  will  will  prob- 
ably have  been  executed  in  accordance  with  the  laws 
of  Pennsylvania.  The  question  arises  whether  such 
a  will  is  valid  to  convey  real  property  which  he  owns 
in  New  York,  California,  and  Massachusetts.  Inso- 
far as  the  will  affects  real  property,  the  mode  of  exe- 
cution and  its  validity  will  be  controlled  by  the  law 
of  the  jurisdiction  in  which  the  real  property  is 
situated.  If,  then,  the  will  had  two  witnesses  only,  as 
required  by  the  Pennsylvania  law,  but  three  witnesses 
are  required  in  one  of  the  other  States  named,  he 
would  die  intestate  as  far  as  the  real  property  in  the 
other  State  is  concerned.  Difficult  questions  some- 
times arise  in  regard  to  gifts  to  charities.  Some 
States  limit  the  amount  which  a  charitable  corpora- 
tion may  receive  as  a  gift  under  a  will,  and  other 
States  require  that  the  gifts  must  be  executed  within 
a  certain  time  before  the  decedent's  death.  Where 
there  is  a  question  of  this  character  involved  only  a 
careful  examination  of  the  decisions  and  statutes  in 
the  States  concerned  can  furnish  the  basis  for  any 
satisfactory  answer.  If  there  is  personal  property, 
the  requisites  of  validity  and  construction  of  a  will 
are  controlled  by  the  law  of  the  testator's  domicile. 
The  question  as  to  his  domicile  is  sometimes  quite 
difficult  to  determine  and  may  require  a  court  action. 
We  have  had  a  number  of  illustrations  of  that  in  con- 
nection with  the  inheritance  tax  laws,  where  the  of- 
ficers of  one  State  have  sought  to  establish  the  domi- 
cile of  a  particularly  wealthy  person,  who  has  just 


338  COMMERCIAL    LAW 

died,  within  that  State  in  order  that  they  may  secure 
the  inheritance  tax  for  the  State,  which  would  of 
course,  be  much  larger  if  the  person  were  adjudged 
a  resident  of  that  State  than  it  would  be  if  he  were 
held  to  be  a  non-resident. 

CONTRACTS  TO  MAKE  A  WILL.— It  some- 
times happens  that  one  person  may  make  a  contract 
whereby  he  agrees  to  make  a  will  in  favor  of  another 
person.  A,  75  years  old,  and  of  the  proper  mental 
capacity  to  make  a  will,  makes  a  contract  with  Mary 
Jones,  that,  if  she  will  live  in  his  house  and  act  as 
housekeeper  as  long  as  he  lives,  he  will  make  a  will 
and  in  it  give  her  his  house  and  $5000.  He  fails  to 
make  his  will  and  dies  suddenly  at  the  end  of  the  year 
after  the  making  of  this  contract.  It  is  generally 
recognized  that  contracts  of  this  nature  are  valid. 
The  general  rules  applicable  to  contracts  apply  here. 
There  must  be  consideration,  the  contract  must  be 
certain  in  its  terms,  and  as  such  contracts  are  not 
favored  by  the  courts,  because  they  are  open  to  many 
forms  of  fraud,  they  must  be  proved  by  clear  and  con- 
vincing evidence,  and  the  contract  would  have  to  be 
in  writing  under  the  provisions  of  the  Statute  of 
Frauds.  In  the  illustration  suggested,  the  further 
question  arises,  what  is  the  remedy  on  the  part  of  the 
housekeeper  for  a  breach  of  contract.  Ordinarily 
there  are  two  proceedings  open  in  such  a  case.  The 
personal  representative  of  the  deceased  might  be  sued 
at  law  to  recover  damages  for  a  breach  of  contract,  or 
one  might  proceed  in  equity  to  compel  the  parties 
who  take  the  legal  title  to  the  house,  in  consequence 


COMMERCIAL    LAW  339 

of  the  failure  of  the  decedent  to  make  his  will  as  he 
contracted  to  do,  to  convey  the  property  which  would 
have  been  conveyed  by  the  will,  had  the  will  been 
made  in  compliance  with  the  contract. 

TRUSTS  DEFINED.— In  Bouvier's  Law  Dic- 
tionary, trusts  are  defined  as  obligations  imposed, 
either  expressly  or  by  implication  of  law,  whereby 
the  obligor  is  bound  to  deal  with  property,  over  which 
he  has  control,  for  the  benefit  of  certain  persons  of 
whom  he  may  himself  be  one,  and  any  one  of  whom 
may  enforce  the  obligation.  A  trust  arises  when  prop- 
erty has  been  conveyed  to  one  person  and  accepted 
by  him  for  the  benefit  of  another.  The  person  who 
holds  the  property  and  the  legal  title  is  called  the 
trustee,  and  the  person  for  whom  it  is  held  is  termed 
the  beneficiary  or  "cestui  que  trust."  Trusts  are 
created  for  a  great  variety  of  purposes.  It  is  very 
common  to  create  them  by  a  will,  the  testator  ap- 
pointing a  trustee  to  manage  a  trust  fund  which  he 
sets  aside  for  the  maintenance  and  support  of  a  cer- 
tain person  or  a  certain  institution.  A  new  device  for 
creating  a  trust  for  the  carrying  on  of  a  business,  seems 
to  be  growing  in  popularity.  The  practice  apparently 
began  in  Massachusetts  with  the  creation  of  a  trust 
for  the  operation  of  an  office  building  and  similar 
undertakings.  Under  this  arrangement,  a  trust 
estate  may  have  transferable  shares,  exemption  of 
shareholder's  liability,  and  frequently  enjoys  peculiar 
advantages  in  taxation  matters.  These  organiza- 
tions are  sometimes  spoken  of  as  common  law  cor- 
porations.    They  are  so  comparatively  new  that  the 


340  COMMERCIAL    LAW 

closest  care  should  be  exercised  in  operating  a  busi- 
ness under  this  form  of  organization.  We  shall  now 
consider  the  powers  and  duties  of  trustees  and  include 
with  them  executors  and  administrators. 

TRUSTEES,  EXECUTORS,  AND  ADMINIS- 
TRATORS.— Trustees,  executors  and  administra- 
tors may  be  classed  together  because  they  are  alike 
in  that  they  hold  legal  title  to  property  which  is  held 
by  them  for  the  benefit  of  other  persons.  They  hold 
the  legal  title.  A  trustee  is  the  owner  of  the  prop- 
erty, and  any  one  who  seeks  a  transfer  of  the  legal 
title  of  the  property  must  get  it  from  the  trustee. 
Executors  have  exactly  the  same  powers  as  admin- 
istrators, aside  from  powers  that  may  be  expressly 
given  in  the  will.  The  difference  in  name  is  simply 
because  an  executor  is  appointed  by  the  will  of  the 
testator,  whereas  an  administrator  is  appointed  by 
the  court  to  take  charge  of  an  estate  for  which  no 
executor  has  been  named  in  a  testator's  will,  or  where 
the  executor  may  have  died  or  refused  to  act,  or,  the 
most  frequent  case,  where  the  deceased  died  intestate. 

THEIR  APPOINTMENT.— Were  it  not  for 
statutes,  a  trustee  or  an  executor  would  become  such 
simply  because  somebody  had  made  him  a  trustee  or 
an  executor  without  any  appointment  or  assistance 
from  the  court.  But  in  the  appointment  of  executors 
or  trustees,  under  wills,  the  court  is  by  statute 
generally  required  to  make  an  appointment  to  give 
validity  to  a  nomination  or  appointment  in  the  testa- 
tor's will.  Administrators,  of  course,  from  their 
very  nature,  have  to  be  appointed  by  the  court.     A 


COMMERCIAL   LAW  341 

trust,  however,  may  be  created  between  living  per- 
sons without  any  appointment  by  the  court,  and 
frequently  is.  A  real  estate  trust  may  be  created  by 
simply  conveying  property  to  trustees  on  the  trust 
that  they  manage  it  and  pay  the  income  to  the  bene- 
ficiaries, and  a  great  variety  of  trusts  are  constantly 
created  without  an  appointment  from  the  court. 
Wherever  any  question  on  a  trust  arises,  or  wher- 
ever the  appointment  of  a  new  trustee  is  necessary, 
however,  the  court  has  jurisdiction,  and  any  person 
interested  in  the  trust  can  bring  the  matter  before 
the  court.  When  a  testator  dies  the  person  named 
as  executor  in  the  will  petitions  for  appointment, 
and  unless  there  is  some  reason  why  he  should  not 
be  appointed  he  doubtless  will  be  appointed.  If 
there  is  no  executor,  then  the  persons,  or  benefi- 
ciaries, interested  in  the  estate,  usually  agree  on  some 
one  to  administer  the  estate,  and  a  petition  is  filed  for 
his  appointment.  The  person  who  is  next  of  kin,  and 
competent  to  act,  is  generally  appointed  in  the  ab- 
sence of  agreement.  These  officers  remain  in  office 
and  retain  their  powers  until  their  work  is  completed, 
unless  they  are  sooner  removed,  which  they  may  be 
at  any  time  for  cause. 

THEIR  POWERS.— What  powers  do  these 
persons  have?  Do  they  have  power  to  sell?  We 
must  first  always  look  at  the  terms  of  the  trust.  If 
we  are  dealing  with  a  trustee  under  a  will  we  look 
at  the  will  to  see  what  powers  the  testator  gave  him. 
If  we  are  looking  at  a  question  of  a  trust  under  a  deed, 
we  look  at  the  deed,  and  the  right  of  an  executor  to 


342  COMMERCIAL    LAW 

sell  real  estate  similarly  depends  on  whether  any 
such  power  has  been  given  him  in  the  will.     Aside 
from  express  power  given  in  the  instrument,  a  trus- 
tee has  no  power  to  sell  either  real  or  personal  prop- 
erty unless  the  power  is  expressly  given  or  unless  the 
nature  of  the  trust  is  such  as  necessarily  implies  the 
power,  and  courts  are  very  slow  in  construing  the 
existence  of  such  power  by  implication.     An  exe- 
cutor, on  the  other  hand,  since  his  duty  is  to  reduce 
the  personal  property  of  an  estate  to  cash,  and  dis- 
tribute it,  has,  in  most  States,  implied  power  to  sell 
personal  property.     He  has,  however,  no  power  to 
sell  real  estate  unless  the  will  expressly  gives  such 
power.     The  court  may  authorize  him  to  sell  real 
estate,  and  will  authorize  him,  if  it  is  necessary  to 
pay  debts  or  legacies,  but  only  in  such  cases  unless 
a  power  is  expressly  given.     Trustees,  executors  and 
administrators  have  no  power  to  pledge  property  un- 
less expressly  given  in  the  instrument  under  which 
they  act.     They  have  power  to  make  such  contracts 
as  are  necessary  to  carry  out  their  trust,  but  only 
these,  and  even  when  they  make  such  contracts  they 
are  personally  liable  upon  them,  having,  however,  a 
right  of  reimbursement  from  the  estate  which  they 
represent.     If    they    entered    into    an    unauthorized 
contract  they  would  be  liable  upon  it  personally  and 
have  no  right  of  reimbursement. 

THEIR  DUTIES.— Their  first  duty  is  the  care 
and  custody  of  the  property  in  their  charge.  A 
trustee,  whose  duty  is  to  hold  property,  is  bound  to 
keep  it  invested  so  as  to  bring  in  an  income,  whereas 


COMMERCIAL    LAW  343 

an  executor  has  no  right  to  invest  funds  of  the  estate, 
except  under  the  direction  of  the  court;  if  he  does 
so  he  will  take  the  chance  of  loss,  and  the  beneficiary 
can  not  only  hold  him  liable  for  loss  but  can  also  take 
the  profit  should  the  investment  prove  profitable. 
The  executor's  duty  is  to  reduce  the  property  to  cash 
and  distribute  it  to  the  proper  parties.  All  these  offi- 
cers owe  the  same  duty  of  fidelity  to  their  beneficiary 
that  an  agent  owes  to  his  principal.  There  is  the 
same  duty  to  execute  the  trust  personally  and  not 
delegate  authority,  except  in  regard  to  ministerial  or 
mechanical  acts.  There  is  the  same  duty  to  account, 
and  furthermore,  the  accounts  of  these  officers,  if 
they  are  appointed  by  the  court,  must  be  filed  in  court. 
The  trustee  to  carry  out  his  trust  will  ordinarily  dis- 
tribute the  income  to  the  persons  entitled,  but,  of 
course,  trusts  are  of  great  variety,  and  not  infre- 
quently the  object  of  a  trust  is  to  accumulate  the 
income.  Whatever  the  terms  of  the  trust  are  they 
must  be  carried  out.  The  duties  of  the  executor  and 
administrator  are  to  distribute  the  estate  by  paying 
creditors  first  and  the  surplus  to  legatees  or  the  next 
of  kin  legally  entitled.  They  are  allowed  a  fixed 
period,  in  many  States  two  years,  to  settle  an  estate. 
One  of  the  most  essential  duties  of  any  fiduciary 
is  to  keep  the  property  he  holds  as  a  fiduciary  sep- 
arate and  distinct  from  his  own.  This  means  that  a 
trustee  or  executor  receiving  current  income  must 
keep  a  separate  bank  account  as  trustee  or  executor, 
and  of  course  he  should  not  draw  checks  on  that  fund 
for  personal  debts. 


CHAPTER  XI 


Carriers  and  Warehousemen 

CARRIERS  WHO  ARE  PUBLIC  SERVICE 
COMPANIES.— Common  Carriers—that  is, 
railroads,  express  companies,  and  other  per- 
sons or  corporations  who  carry  goods  for  hire  and 
hold  themselves  out  to  the  public  as  engaged  in  the 
business  of  carrying  goods  for  anybody  for  hire — are 
engaged  in  a  public  service.  A  man  who  owns  a  tramp 
steamer  and  gets  cargoes  as  he  can,  is  not  engaged  in  a 
public  service — he  is  not  a  common  carrier  or  public 
carrier;  but  a  person  who  has  a  line  of  steamers,  or 
even  one  steamer,  regularly  engaged  in  plying  be- 
tween different  places  and  taking  goods  as  offered  for 
hire,  is  engaged  in  public  service. 

DUTIES  OF  ONE  ENGAGED  IN  PUBLIC 
SERVICE. — Now,  being  engaged  in  public  service 
subjects  a  person  or  corporation  who  is  so  engaged  to 
some  special  duties.  Such  a  person  cannot  make  any 
bargain  he  pleases  with  anybody  he  pleases,  and  re- 
fuse to  make  bargains  with  others,  as  an  ordinary 
person  can.  It  is  the  duty  of  any  one  engaged  in  a 
public  service  to  give  reasonable  service  to  all  who 
apply,  without  discrimination,  and  for  reasonable 
compensation.  Of  course,  carriers  are  not  the  only 
public-service  corporations;  electric  light  companies 
or  gas  companies  or  water  companies  are  other  illus- 
trations; but  common  carriers,  and  especially  railroads, 
are  the  most  prominent  public-service  corporations. 

344 


COMMERCIAL   LAW  345 

RAILROAD  COMMISSIONS.— Not  only  is 
there  this  common-law  duty  to  serve  all  without  dis- 
crimination and  at  reasonable  prices,  but  both  the 
States  and  the  United  States  have  established  commis- 
sions to  look  after  railroads  and  other  carriers  to  see 
that  they  properly  perform  their  duties.  The  Rail- 
road or  Public  Service  Commission  in  most  States 
has  a  great  variety  of  powers  for  compelling  railroads 
to  give  proper  service.  The  chief  function  of  the 
Federal  Interstate  Commerce  Commission  originally, 
was  in  regard  to  rates,  but  its  powers  have  since  been 
enlarged  by  legislation.  The  Interstate  Commerce 
Commission  has  the  power  concerning  interstate  com- 
merce to  say  whether  rates  and  practices  are  rea- 
sonable. A  carrier  is  obliged  to  file  with  the  In- 
terstate Commerce  Commission  a  schedule  of  its 
rates,  and  regulations  concerning  rates,  and  is  also 
required  to  post  these  rates  publicly  in  its  stations. 
If  anybody  objects  to  the  rates  they  must  make  com- 
plaint before  the  Interstate  Commerce  Commission. 
That  is  the  only  form  of  redress,  and  sometimes  not 
an  easy  one  for  a  person  who  is  merely  interested  in 
a  single  shipment,  because  the  expense  and  delay  of 
proceedings  before  the  Interstate  Commerce  Com- 
mission are  such  as  to  be  prohibitive,  unless  the  com- 
plainant's financial  interest  in  the  matter  is  consider- 
able. It  is  common,  therefore,  for  shippers'  associa- 
tions to  take  that  sort  of  question  up  rather  than  to 
leave  it  for  individual  shippers.  Any  contract  made 
by  a  carrier  for  either  more  or  less  than  the  scheduled 
rate  is  illegal  and  void. 


346  COMMERCIAL    LAW 

CARRIER'S  COMMON-LAW  LIABILITY 
FOR  GOODS. — A  carrier,  at  common  law,  when  he 
receives  goods  for  transportation,  is  subject  to  a  de- 
gree of  liability  beyond  that  imposed  on  any  other 
person.  An  ordinary  person  who  receives  goods — a 
bailee,  as  he  is  called  in  law — is  merely  liable  for  the 
consequences  of  his  negligence.  A  carrier,  however, 
while  goods  are  in  course  of  transportation  is  liable, 
at  common  law,  as  an  insurer  against  all  kinds  of  ac- 
cidents except  those  caused  by  act  of  God  or  public 
enemies.  For  instance,  if  goods  were  struck  by 
lightning  in  transit  that  would  be  an  act  of  God,  and 
the  carrier  would  not  be  liable;  but  if  goods  caught 
fire  from  any  other  cause,  as  from  neglect  of  an  out- 
sider or  the  act  of  an  incendiary,  the  carrier  would  be 
liable.  Carriers,  of  course,  dislike  that  and  try  to 
contract  away  their  liability.  They  are  allowed  by 
law  to  do  so,  except  that  they  are  not  allowed  to 
contract  for  exemption  from  the  consequences  of 
their  own  negligence.  It  is  largely  this  desire  of  car- 
riers to  free  themselves  from  the  extreme  liability 
which  the  common  law  imposes  on  them,  that  in- 
duces them  to  give  bills  of  lading.  Bills  of  lading  are 
often  required  by  law,  but  carriers  are  pleased  to 
issue  them,  as  they  can  in  that  way  contract  to  ex- 
empt themselves  from  this  extreme  liability,  which 
lasts  while  the  goods  are  in  transit  and  until  the  con- 
signee has  had  a  reasonable  time  to  remove  them 
from  the  carrier's  possession.  If  the  consignee  fails 
to  remove  them  with  reasonable  promptness  the  car- 
rier then  becomes  liable,  merely  as  a  warehouseman 


COMMERCIAL    LAW  347 

may,  for  its  own  neglect.  The  extreme  liability  of 
the  carrier  does  not  extend  to  damage  caused  by  de- 
lay. The  carrier  is  liable  for  delays  in  so  far  as  they 
are  caused  by  its  own  neglect,  but  otherwise  is  not 
liable.  A  carrier  need  not  deliver  the  goods  unless 
freight  is  paid,  as  it  has  a  lien  for  freight  charges. 

THREEFOLD  NATURE  OF  BILL  OF  LAD- 
ING.— A  bill  of  lading  issued  by  a  carrier  for  goods 
has  a  threefold  character.  In  the  first  place  it  is  a 
receipt.  The  importance  of  a  receipt  is  as  evidence 
of  just  what  was  shipped.  It  is  important  to  the 
shipper  as  proof  that  the  carrier  received  goods,  of 
such  a  quantity  and  of  such  a  description,  in  good 
order.  It  is  important  to  the  carrier  as  proof  of  the 
same  thing,  to  prevent  the  shipper  from  claiming  that 
he  has  shipped  different  kinds  or  quantities  of  goods 
from  those  described  in  the  bill  of  lading.  The  sec- 
ond aspect  of  a  bill  of  lading  is  as  a  contract.  It  is 
not  only  a  receipt  but  a  contract  between  the  parties, 
the  shipper  and  the  carrier.  It  is  as  a  contract  that 
the  stipulations  it  contains  for  limitation,  of  liability 
are  important.  Third,  it  is  an  order,  when  properly 
indorsed  and  surrendered,  for  the  delivery  of  the 
goods. 

CARRIERS  CAN  DELIVER  GOODS  ONLY 
TO  HOLDERS  OF  ORDER  BILLS  OF  LADING. 
— The  thing  that  makes  a  bill  of  lading  valuable,  to 
buy  or  lend  money  on,  is  the  fact  that  the  carrier  will 
hold  the  goods  behind  the  bill  of  lading  until  the  bill 
is  itself  presented  and  surrendered.  If  the  carrier 
were  to  deliver  the  goods  upon  demand  to  anybody, 


348  COMMERCIAL    LAW 

other  than  the  holder  of  the  bill  of  lading,  it  is  obvi- 
ous that  there  would  not  be  much  use  in  holding  the 
bill  of  lading.  The  carriers  have  made  a  great  con- 
test on  this  question  in  the  past.  They  have  con- 
tended that  they  fulfill  their  duty  if  they  deliver  the 
goods  to  the  consignee  originally  named  in  the  bill 
of  lading,  whether  that  consignee  continues  to  hold 
the  documents  or  not.  But  that  has  been  decided 
against  them  so  far  as  order  bills  are  concerned  (that 
is,  bills,  which  state  that  the  goods  are  deliverable 
not  simply  to  a  consignee  but  to  the  order  of  a  con- 
signee) and  these  order  bills  have  printed  on  them 
the  provision  that  the  bill  itself  must  be  surrendered 
before  the  goods  will  be  delivered. 

CARRIERS  MAY  DELIVER  TO  CON- 
SIGNEE OF  STRAIGHT  BILLS  OF  LADING.— 
In  a  straight  or  flat  bill,  however  (that  is,  one  with- 
out the  word  "order")  the  carrier's  contention  has  been 
upheld  and  the  carrier  is  allowed  to  deliver  the  goods 
to  the  consignee,  even  though  the  consignee  does  not 
present  the  bill  of  lading  and  for  all  the  carrier  knows 
is  not  the  owner  of  the  bill  of  lading  or  of  the  goods. 

BILLS  OF  LADING  USED  TO  ENABLE 
SELLER  TO  RETAIN  HOLD  ON  GOODS.— The 
ways  in  which  bills  of  lading  may  be  used,  and  are 
used,  in  the  mercantile  world,  must  be  understood 
before  the  legal  questions  which  arise,  concerning 
them,  can  be  grasped.  The  primary  and  original  pur- 
pose of  using  bills  of  lading  as  symbols  of  the  goods, 
was  doubtless  to  secure  the  seller  in  his  hold  on  the 
goods  until  he  received  the  price,  and  that  is  still  a 


COMMERCIAL    LAW  349 

vital  purpose  in  the  use  of  bills  of  lading.  We  have 
learned,  in  the  case  of  the  sale  of  goods,  that  unless 
credit  is  given,  the  delivery  of  the  goods  and  the 
payment  of  the  price  are  concurrent  conditions. 
Now,  when  the  parties  reside  at  a  distance  there  is 
difficulty  in  working  out  these  concurrent  conditions. 
If  the  seller  ships  the  goods  directly  to  the  buyer,  he 
loses  his  hold  on  the  goods,  and  if  the  buyer  does 
not  keep  his  agreement  to  pay  promptly,  the  seller 
will  be  unable  to  do  anything  about  it.  On  the  other 
hand,  of  course,  the  buyer  does  not  want  to  pay  in 
advance.  Now,  by  means  of  bills  of  lading,  the  seller 
is  enabled  to  keep  his  hold  on  the  goods  until  he  re- 
ceives the  price,  and  the  buyer  is  enabled  to  secure 
possession  of  the  goods  as  soon  as  he  pays  the  price. 

STRAIGHT  BILLS  TO  BUYER  GIVE  THE 
SELLER  NO  HOLD  ON  GOODS.— The  bill  of  lad- 
ing may  be  used  in  various  ways.  Suppose,  first,  the 
seller  when  he  ships  the  goods  takes  a  straight  bill 
to  the  buyer.  That  will  not  give  the  seller  any  hold, 
for  the  carrier  will  be  discharged  if  without  demand- 
ing the  surrender  of  the  bill  of  lading,  he  delivers  to 
the  consignee  named.  So  we  may  cross  off  that  as  a 
possible  means  of  protecting  the  seller. 

STRAIGHT  BILLS  TO  THE  SELLER.— The 
second  possibility  is  for  the  seller  to  take  a  straight 
bill,  naming  himself  as  consignee  as  well  as  consigner. 
If  that  is  done  the  buyer  cannot  get  the  goods  at  once. 
Suppose  the  bill  of  lading  was  sent  forward,  even  that 
would  not  of  itself  enable  the  buyer  to  get  the  goods, 
if  the  carrier  wished  to  be  technical,  since  in  a  straight 


350  COMMERCIAL    LAW 

bill  the  goods  are  deliverable  not  to  the  holder  of  the 
bill,  but  to  the  consignee  named  therein.  There  would 
have  to  be  attached  to  the  bill  of  lading  an  order  from 
the  seller,  who  is  named  as  consignee  in  the  bill,  direct- 
ing the  railroad  to  deliver  the  goods  to  the  buyer  in- 
stead of  to  himself,  the  consignee  named  in  the  bill. 
That  would  be  a  perfectly  feasible  matter,  but  this 
method  is  not  much  used,  and  one  reason  why  it  is 
not  much  used  is  because  the  seller  frequently  wants 
to  do  something  else  besides  keep  control  of  the  goods 
until  the  buyer  pays  for  them.  He  oftentimes  wants 
to  get  money  from  a  bank  in  the  meantime. 

USE  OF  BILLS  OF  LADING  BY  SELLER 
TO  OBTAIN  LOANS.— When  the  seller  is  desirous 
of  borrowing  money  from  a  bank,  he  takes  the  bill  of 
lading  to  the  bank  with  a  bill  of  exchange  drawn  on 
the  buyer,  and  he  asks  the  bank  at  his  home  town  to 
discount  the  bill  of  exchange,  taking  as  security  the 
bill  of  lading.  If  his  home  bank  does  this,  it  then  sends 
the  draft,  with  bill  of  lading  attached,  to  its  corre- 
spondent bank  in  the  buyer's  city,  where  the  draft  is 
presented  to  the  drawee,  who  is  the  buyer,  and  if  the 
buyer  honors  the  draft  then  he  is  given  the  bill  of 
lading.  Now,  banks  would  not  do  this,  ought  not  to  do 
it  (occasionally  they  have),  with  a  straight  bill,  even 
if  the  bill  is  drawn  naming  the  seller  as  consignee, 
for  the  bank  when  it  discounts  the  bill  of  exchange 
and  gets  the  bill  of  lading  as  security  gets  no  real 
hold  on  the  goods.  The  railroad  may  deliver  the 
goods  to  the  consignee — the  seller — without  ever  see- 
ing the  bill  of  lading,  and  without  the  bank,  which 


COMMERCIAL    LAW  351 

holds  the  bill  of  lading,  ever  knowing  anything  about 
it;  or  the  railroad  may  deliver  to  the  buyer  or  some 
third  person  on  a  written  order  signed  by  the  con- 
signee. In  other  words,  the  railroad  does  not  have  to 
hold  the  goods  until  the  bill  of  lading,  properly  in- 
dorsed, is  presented  to  it. 

STRAIGHT  BILLS  OF  LADING  GIVE  NO 
SECURITY  TO  BANK.— The  first  and  fundamental 
requirement,  then,  for  any  bank  which  may  deal  with 
bills  of  lading  is  never  to  have  anything  to  do  with 
straight  bills.  They  give  no  security.  A  straight  bill 
is  readily  distinguishable  from  an  order  bill  on  rail- 
roads in  most  parts  of  the  country,  at  least,  because 
uniform  bills  of  lading  are  now  in  use,  and  the  straight 
bill  is  always  white  and  the  order  bill  is  always  yel- 
low. In  foreign  bills  a  greater  variety  of  forms  are 
used,  and  you  may  have  to  examine  the  terms  of  the 
bill  before  you  can  feel  satisfied  that  it  is  of  a  sort 
that  will  give  security.  The  vital  words  in  bills  of 
lading,  as  in  negotiable  paper,  are  the  words,  "order 
of"  or  "or  order."  If  those  are  in  a  bill  of  lading  it 
is  all  right  as  far  as  this  matter  is  concerned.  There- 
fore the  third  and  fourth  possible  ways  in  which  the 
seller  may  take  the  bill  of  lading  to  secure  himself 
are  the  only  ones  which  will  enable  him  to  finance  the 
shipment  at  once. 

BILLS  OF  LADING  TO  BUYER'S  ORDER.— 
The  third  way  which  the  seller  may  act  in  order  to 
fulfill  his  purpose  is  to  take  an  order  bill  of  lading 
to  the  buyer's  order.  Although  the  bill  of  lading  runs 
to  the  buyer's  order,  and  although,  therefore,  title  to 


352  COMMERCIAL    LAW 

the  goods  will  pass  to  the  buyer  on  shipment,  the 
buyer  cannot  get  the  goods  without  that  bill  of  lading. 
Therefore,  so  long  as  the  seller  retains  the  bill  of  lad- 
ing nobody  can  get  the  goods  from  the  carrier;  and 
though  the  seller  has  parted  with  title  to  the  goods, 
since  he  made  the  bill  of  lading  run  to  the  buyer's 
order,  still  he  has  retained  control  of  them.  Though 
it  gives  a  security  to  the  seller,  and  would  give 
security  to  the  bank,  if  the  bank  discounted  a  bill 
of  exchange  drawn  on  the  buyer  and  took  this 
bill  of  lading  as  security,  it  is  not  a  desirable  method 
for  this  reason :  though  the  buyer  cannot  get  the  goods 
without  the  bill  of  lading,  nobody  else  can  get  the 
goods  without  a  lot  of  trouble,  unless  he  has  not  only 
the  bill  of  lading  but  the  buyer's  indorsement  upon  it. 
The  bill  of  lading  is  drawn  to  the  buyer's  order,  and 
if  the  buyer  fails  to  pay  and  repudiates  his  contract, 
the  bank  or  the  seller  will  have  trouble  in  getting  back 
the  goods.  They  will  have  to  prove  to  the  railroad 
that  the  buyer  really  has  made  default  and  that  he  no 
longer  has  any  real  interest  in  the  goods. 

BILLS  OF  LADING  TO  THE  SELLER'S  OR- 
DER.— Accordingly,  it  is  the  fourth  method  which  is 
in  general  use  and  which  should  be  exclusively  used. 
The  seller  takes  the  bill  of  lading  to  his  own  order  and 
indorses  it  in  blank;  then  he  delivers  it  to  his 
bank  as  security  for  a  bill  of  exchange.  If  the  bill  of 
exchange  is  paid  by  the  drawee  on  presentment  at 
his  city,  he  is  given  the  bill  of  lading  at  once  and  he 
gets  what  he  wants.  On  the  other  hand,  if  the  buyer 
does  not  pay  the  draft  on  presentment,  then  the  bank 


COMMERCIAL   LAW  353 

can  realize  on  the  security  at  once,  if  it  wants  to, 
because  it  has  a  bill  of  lading  in  its  hands  indorsed  by 
the  consignee  to  whose  order  it  was  drawn.  If  the 
bank  proceeds  against  the  seller  as  the  drawer  of  the 
draft,  when  the  latter  pays  and  takes  up  the  bill  of 
lading  he  can  similarly  realize  on  the  security,  or  get 
the  goods  back,  because  he  will  have  a  bill  of  lading 
in  his  possession  which  runs  to  his  own  order. 

BILLS  OF  LADING  TO  "ORDER  NOTIFY." 
— A  slight  modification  of  this  form  of  bill  of  lading  is 
made  in  order  to  let  the  buyer  know  when  the  goods 
arrive.  When  goods  arrive  at  their  destination  it  is 
a  customary  courtesy  of  railroads  to  notify  the  con- 
signee; but  if  goods  are  consigned  to  the  seller's  order, 
the  man  who  is  really  trying  to  buy  the  goods  gets  no 
notice,  as  his  name  does  not  appear  on  the  bill  of  lad- 
ing. To  avoid  that  difficulty  there  is  generally  put 
on  bills  of  lading,  taken  out  to  the  seller's  order  when 
the  goods  are  shipped  in  fulfillment  of  some  contract 
or  order,  the  words,  "Notify  X  Y,"  X  Y  being  the 
prospective  buyer  of  the  goods.  Then  when  the  goods 
arrive  the  railroad  notifies  X  Y ;  he  learns  the  goods 
are  there  and  makes  his  plans  accordingly.  These 
bills  of  lading  are  often  called  "bills  to  order  notify." 
The  person  who  is  to  be  notified  is  sometimes  incor- 
rectly called  the  consignee  of  the  bill.  The  consignee 
is  the  person  to  whom  the  goods  are  deliverable,  not 
the  person  who  is  to  be  notified  necessarily ;  and  where 
a  bill  is  to  the  seller's  order  the  goods  are,  by  the 
terms  of  the  bill  of  lading,  deliverable  to  the  seller  and 
he  is  the  consignee. 


354  COMMERCIAL    LAW 

CROPS  ARE  MOVED  BY  USE  OF  BILLS  OF 
LADING. — The  various  uses  of  bills  of  lading  by  sell- 
ers in  order  to  insure  concurrent  payment  by  the 
buyer,  and  in  order,  with  the  aid  of  banks,  to  put  them- 
selves in  funds  while  the  goods  are  in  transit,  is  a  very 
important  function  of  bills  of  lading.  It  is  by  such 
means  the  great  crops  of  the  country  are  moved,  es- 
pecially the  cotton  crop,  which  is  moved  almost 
wholly  in  this  manner.  The  southern  banks  discount 
bills  of  exchange,  which  are  customarily  secured  by 
bills  of  lading.  The  New  York  banks  rediscount  these 
bills  of  exchange  and  draw  for  a  great  part  of  the 
price  of  the  cotton  on  English  bankers.  This  use  by 
sellers  of  bills  of  lading,  however,  is  not  the  only  mer- 
cantile use  of  bills  of  lading. 

BILLS  OF  LADING  TO  BANKER'S  ORDER. 
— Here  is  another  method  used,  especially  common  in 
foreign  commerce.  A  merchant  in  Boston  wants  to 
buy  a  cargo  of  goods  from  Europe,  but  he  has  not  the 
money  to  do  it.  The  seller  in  Europe  does  not  know 
him  and  will  not  give  him  credit,  so  the  merchant  goes 
to  bankers  who  have  available  foreign  correspondents 
and  states  his  case,  and  if  he  is  in  good  credit  with  the 
bankers  they  say,  "Order  the  goods  from  the  man  in 
Germany  of  whom  you  were  planning  to  order  them, 
and  tell  him  to  make  the  bill  of  lading  out  to  us,  and 
draw  on  us  or  on  our  correspondents  in  Berlin  or 
London  or  Paris.  On  receipt  of  those  bills  of  lading 
naming  us  as  consignee  we  will  pay,  or  cause  to  be 
paid,  the  bills  of  exchange  attached  thereto  for  the 
price."    In  this  way  the  goods  are  shipped  directly  to 


COMMERCIAL    LAW  355 

the  banker.  In  the  cases  mentioned  before,  the  banker 
took  an  indorsed  bill  of  lading,  but  in  this  mode  of 
dealing  the  banker  is  himself  the  consignee,  and  on  the 
faith  of  the  consignment  he  pays  the  price  of  the 
goods.  Then  he  delivers  the  bill  of  lading,  indorsed, 
to  the  buyer,  his  customer,  on  the  buyer's  making  a 
settlement  or  giving  him  security. 

SURRENDER  OF  BILLS  OF  LADING  FOR 
TRUST  RECEIPTS.— There  is  one  method  of  doing 
business  in  this  connection  which  causes  some  risk  to 
the  bankers  who  engage  in  it.  They  frequently  allow 
their  customer,  the  buyer,  to  take  the  bill  of  lading, 
indorsed,  for  the  purpose  of  entering  the  goods  at  the 
Custom  House,  or  warehousing  them,  or  even  for  the 
purpose  of  selling  the  goods,  so  that  the  buyer  will 
be  in  funds  to  enable  him  to  discharge  his  debt  to  the 
banker.  The  banker  takes,  when  he  does  this,  from 
the  buyer  to  whom  he  delivers  the  indorsed  bill  of 
lading,  what  are  called  "trust  receipts."  These  re- 
ceipts state  that  the  buyer  has  taken  these  bills  of  lad- 
ing, that  he  holds  them  as  a  trustee,  that  they  really 
belong  to  the  banker,  and  that  the  buyer  holds  them 
simply  for  a  special  purpose,  such  as  to  enter  them 
at  the  Custom  House  or  to  resell  them  and  turn  the 
proceeds  over  to  the  banker.  If  the  buyer  is  honest, 
well  and  good ;  but  if  he  should  be  financially  pressed 
and  dispose  of  that  bill  of  lading,  many  courts,  at 
least,  would  not  protect  the  banker,  but  would  pro- 
tect the  bona  fide  purchaser.  What  the  banker  ought 
to  do  is  to  stamp  upon  the  bill  of  lading,  if  he  delivers 
it  to  the  buyer,  that  a  trust  receipt  has  been  issued 


356  COMMERCIAL    LAW 

for  certain  specified  purposes.  In  that  case  any  pur- 
chaser of  the  bill  of  lading  would  have  notice  of  the 
terms  of  the  trust. 

CHANGE  OF  ROUTING.— An  analogous  prob- 
lem also  may  be  supposed.  A  bank  holds  a  draft  for 
collection  with  bill  of  lading  attached.  It  sometimes 
allows  the  drawee  to  take  possession  of  the  bill  of 
lading  and  change  the  routing  of  the  car.  That  is 
done  because  the  buyer  sometimes  sells  the  goods  be- 
fore he  receives  them,  and  to  save  additional  freight 
bills,  he  changes  the  routing  on  the  original  bills  of 
lading.  What  risk  does  the  bank  run  if  it  allows  him 
to  have  possession  of  the  bill  of  lading  indorsed  in 
blank?  It  runs  the  same  risk  as  in  case  of  trust  re- 
ceipts. The  fact  that  the  purpose  was  to  change  the 
routing  of  the  goods  is  apparently  immaterial.  The 
change  of  destination  does  not  do  the  bank  any  ac- 
tual harm,  except  that  the  goods  will  be  sent  else- 
where, and  perhaps  to  a  point  some  distance  from 
their  original  destination.  The  great  risk  involved  is 
in  allowing  a  man  to  have  possession  of  a  document 
which  in  effect  is  negotiable.  If  the  bank  does  not 
get  back  its  bill  of  lading  it  is  in  a  bad  position.  If  it 
did  get  back  its  bill  of  lading  it  would  still  have  its 
security,  only  it  would  be  subject  to  this  difficulty, 
that  the  goods  instead  of  coming  to  a  place  where  the 
bank  could  conveniently  get  at  them,  have  perhaps 
gone  to  a  distant  city,  where  it  would  be  more  trouble. 
If,  however,  changing  the  routing  and  the  reselling 
involve  a  surrender  of  the  old  bill  to  the  railroad  and 
the  issuing  of  a  new  bill  of  lading  not  only  on  a  new 


COMMERCIAL    LAW  357 

route  but  with  the  purchaser  from  the  consignee 
named  as  a  new  consignee,  then  the  bank  has  thrown 
away  everything,  unless  it  actually  obtains  possession 
of  the  new  bill,  and  even  if  it  does  it  has  only  an  in- 
ferior security. 

ACCOMMODATION  BILLS.— Let  us  now 
enumerate  the  risks  which  a  purchaser  or  a  lender 
runs  in  dealing  with  bills  of  lading,  even  with  order 
bills,  and  consider  how  these  risks  can  be  obviated  and 
how  far  they  are  inherent  in  the  nature  of  the  busi- 
ness. The  first  risk  is  that  the  bill  may  have  no  goods 
behind  it,  because  it  was  originally  issued  without  any 
goods.  It  has  been  quite  a  common  practice,  at  some 
points  where  there  is  competition  for  freight,  to  ac- 
commodate customers  by  issuing  a  bill  of  lading  for 
goods  before  the  goods  were  received.  Suppose  a 
seller  in  Chicago  deals  with  a  man  in  Boston;  what 
the  seller  normally  ought  to  do  is  to  buy  goods,  and 
ship  them,  getting  a  bill  of  lading,  then  take  the  bill  of 
lading  to  a  bank  and  get  money  on  the  faith  of  that 
bill  of  lading.  You  will  see  that  that  method  re- 
quires the  seller  to  have  had  money  or  credit  in  the 
first  place,  in  order  to  buy  those  goods  to  ship.  It 
would  be  very  much  more  convenient  for  him  if  he 
could  reverse  the  order  and  get  the  money  from  the 
bank  first,  then  buy  the  goods  and  then  ship  them; 
and  the  kindness  of  the  railroad  agent  frequently  has 
enabled  him  to  do  that.  The  railroad  agent,  trusting 
to  the  seller's  word  that  he  will  ship  goods  to-morrow, 
issues  a  bill  of  lading  to  him  for  the  goods  which  the 
seller  promises  to  ship.    The  seller  dashes  around  to 


358  COMMERCIAL    LAW 

the  bank,  gets  money  and  then  buys  the  goods  and 
ships  them.  He  may  carry  on  business  in  that  way 
for  a  long  time ;  no  trouble  occurs,  nobody  knows  any- 
thing about  it  until  the  seller  either  goes  bankrupt  or 
becomes  dishonest  and  fails  to  ship  the  goods  after 
he  has  got  the  bill  of  lading,  and  then  somebody  finds 
himself  with  a  bill  of  lading  for  which  no  goods  have 
ever  been  received.  Such  bills  have  been  called  "ac- 
commodation" bills  of  lading,  issued  by  the  railroad 
for  the  accommodation  of  the  shipper. 

FICTITIOUS  BILLS  OF  LADING.— In  some 
cases  the  whole  transaction  is  a  fraud.  In  the  case  we 
have  thus  far  been  supposing,  the  railroad  agent  be- 
lieved the  seller  was  going  to  ship  goods,  and  the 
seller  intended  to  do  so,  only  he  wanted  the  bill  of 
lading  first ;  but  money  is  so  easily  obtained,  frequent- 
ly, on  bills  of  lading,  that  sometimes  a  shipper  and  a 
railroad  agent  put  their  heads  together  and  say,  "Let's 
make  a  few  bills  of  lading,"  and  as  a  pure  fraud  the 
agent  writes  bills  of  lading.  These  may  be  called 
fictitious  bills.  They  are  not  exactly  forgeries,  you 
will  see,  since  they  are  drawn  by  the  regular  agent  of 
the  railroad  on  the  regular  railroad  form.  One  who 
took  such  a  bill  as  this,  however,  would  be  protected 
if  the  carrier  were  liable.  Railroads  are  generally, 
and  other  carriers  are  generally,  financially  respon- 
sible, and  therefore  the  great  question  that  interests 
the  holder  of  such  a  bill  is,  are  the  railroads  liable  in 
damages  because  no  goods  are  behind  the  bill  of  lad- 
ing? It  was  held  in  an  English  case,  seventy-five 
years  ago,  that  in  such  a  case  the  carrier  was  not  liable 


COMMERCIAL    LAW  359 

on  the  ground  that  the  agent  who  wrote  the  bill  was 
acting  beyond  the  scope  of  his  authority  in  signing  a 
bill  of  lading  when  no  goods  had  been  received.  That 
decision  has  been  much  criticized,  and  justly  criti- 
cized, because  the  carrier  has  put  that  agent  in  a  posi- 
tion to  determine  when  bills  of  lading  shall  be  issued 
and  when  not.  Of  course,  the  agent  ought  to  exercise 
his  choice  properly,  but  if  the  carrier  has  given  him 
the  power  it  ought  to  be  responsible  for  the  results. 
Nevertheless,  in  a  majority  of  the  States  of  this 
country,  and  in  the  Supreme  Court  of  the  United 
States,  the  English  case  has  been  followed;  and  the 
carrier  would  be  liable  neither  on  an  accommodation 
bill  nor  a  fictitious  bill  where  no  goods  were  shipped. 
There  have  been  some  attempts  to  change  this  rule 
by  statutes,  and  in  some  States  there  is  a  statute,  the 
Uniform  Bill  of  Lading  Act,  so  called,  which  provides 
among  other  things  that  the  carrier  shall  be  liable  in 
the  case  supposed;  but  the  trouble  is  that  bills  of 
lading  dealt  with  in  one  State  will  not  generally  orig- 
inate in  that  State.  If  a  fictitious  bill  was  issued  in 
Chicago,  although  the  bill  named  as  a  consignee  a 
person  in  Boston,  and  was  bought  by  a  Boston  bank, 
the  liability  of  the  carrier  on  that  bill  of  lading  would 
be  determined  by  the  law  of  Illinois.  So,  unless  you 
have  a  satisfactory  law  where  the  bill  originates,  you 
will  not  be  protected.  Fortunately,  the  same  statute 
has  been  passed  in  several  States,  and  it  is  hoped  that 
it  will  be  in  more.  This,  then,  is  the  first  risk,  and  the 
only  way  of  obviating  it  is  to  have  the  law  in  satis- 
factory shape,  passing  a  statute  wherever  it  is  neces- 


360  COMMERCIAL    LAW 

sary,  so  as  to  make  the  carrier  liable  for  the  wrongful 
act  of  its  agent  in  issuing  a  bill  of  lading  when  no 
goods  have  been  received. 

GOODS  BEHIND  BILL  OF  LADING  IN- 
FERIOR IN  KIND  OR  QUALITY.— The  second 
difficulty  is  somewhat  analogous  to  the  first.  Sup- 
pose there  are  some  goods  behind  the  bill  of  lading 
but  they  are  not  of  the  quantity,  quality  or  kind  that 
the  bill  of  lading  specifies.  This  is  a  difficulty  that 
cannot  very  well  be  wholly  obviated.  We  may  sup- 
pose that  the  goods  originally  were  of  defective  qual- 
ity and  kind,  or  that  they  became  so.  Suppose,  first, 
that  a  number  of  barrels  of  sand  are  delivered  to  a 
railroad  and  they  are  marked  barrels  of  sugar,  and 
the  carrier  issues  a  bill  of  lading  for  so  many  barrels 
of  sugar.  Now,  the  purchaser  of  the  bill  of  lading 
finds,  when  he  comes  to  realize  on  his  security,  that  he 
has  got  barrels  of  sand  with  a  freight  bill  against  them 
for  more  than  they  are  worth.  What  can  he  do?  Of 
course,  he  has  a  right  of  action  against  the  fraudulent 
shipper,  but  perhaps  the  shipper  has  run  away  or  is 
irresponsible.  Is  the  carrier  liable  here?  The  answer 
to  this  is,  no.  In  the  first  place,  the  bill  of  lading  says, 
"Contents  and  condition  of  contents  unknown,"  so 
that  the  carrier  has  expressly  guarded  against  prom- 
ising that  the  barrels  really  contained  sugar.  And 
even  aside  from  this  clause,  it  has  been  held  that  the 
carrier  is  not  liable  for  such  a  concealed  defect.  If, 
however,  it  was  apparent  when  the  carrier  received 
the  goods  that  they  were  not  of  the  kind  or  quality 
named,  then  the  carrier  would  be  liable  if  it  issued 


COMMERCIAL   LAW  361 

a  bill  of  lading  without  specifying  the  difficulty. 
Thus,  if  the  bill  of  lading  called  for  100  barrels  of 
sugar  and  there  were  95,  the  carrier  would  be  liable  for 
the  missing  five.  It  has  admitted  it  received  100, 
and  has  promised  to  deliver  100;  it  must  do  so  or  be 
liable. 

SHIPPER'S  LOAD  AND  COUNT.— There  is 
an  exception  to  this  last  statement,  however,  in  regard 
to  one  class  of  bills  which  are  very  common  in  some 
lines  of  trade;  these  are  "shipper's  load  and  count" 
bills.  In  many  cases  railroads  build  spur  tracks  to 
factories  and  run  empty  cars  up  to  the  factories,  where 
the  shipper  loads  the  cars  and  himself  writes  out  the 
bill  of  lading.  An  enormous  fraction  of  the  business 
of  the  country,  consisting  of  the  large  shipments  from 
factories,  at  any  rate,  is  done  in  this  way.  The  rail- 
road agent  simply  signs  a  bill  of  lading  as  it  is  pre- 
sented to  him  by  the  shipper  who  has  made  out  the 
whole  bill  except  the  signature,  and  has  loaded  the 
car,  the  railroad  agent  seeing  nothing  of  it.  The 
railroad  agent  stamps  across  such  a  bill  of  lading, 
"Shipper's  load  and  count."  That  means,  "The  ship- 
per loaded  this  car  and  counted  the  contents.  We  are 
not  responsible,  therefore,  for  the  loading  or  the 
counting."  The  second  great  principle,  in  regard  to 
lending  money  on  bills  of  lading,  is  never  to  touch  a 
shipper's  load  and  count  bill  which  obviously  has  not 
the  responsibility  of  the  carrier.  You  would  have  to 
rely  wholly  on  the  honesty  of  the  shipper.  The  rail- 
roads, seeing  that  they  are  freed  from  liability  on  this 
form  of  bill,  have  sometimes,  in  some  parts  of  the 


362  COMMERCIAL    LAW 

country,  thought  it  would  be  a  good  thing  to  stamp 
every  bill,  "Shipper's  load  and  count."  That  is  an 
injury  to  the  shipper,  because  the  banks  do  not  like  to 
take  such  bills  of  lading,  and  yet  not  infrequently  he 
cannot  do  much  about  it.  In  fruit  shipments  from 
California  that  sort  of  thing  has  been  very  common. 

DESTRUCTION  OF  GOODS  IN  TRANSIT. 
— So  much  for  defects  arising  at  the  time  of  shipment; 
but  one  may  also  have  difficulties  v^^hich  arise  after 
the  shipment.  Suppose  the  goods  are  absolutely  de- 
stroyed in  transit  by  any  of  a  variety  of  causes.  The 
owner  of  the  bill  of  lading  necessarily  loses  his  secur- 
ity, unless  under  the  bill  the  carrier  is  responsible  for 
that  particular  kind  of  loss.  But  it  may  happen  that 
the  carrier  is  not  responsible  for  that  particular  kind 
of  loss.  One  may  protect  himself  here,  perhaps,  by 
insurance  of  some  kind.  That  would  be  the  way  to 
obviate  this  sort  of  risk,  but  if  complete  protection 
against  this  kind  of  risk  is  desired,  the  insurance 
ought  to  be  not  only  against  fire  but  against  destruc- 
tion, or  really  against  deterioration  in  any  form.  Of 
course,  goods  which  are  likely  to  depreciate  in  transit 
are  not  as  good  security  as  goods  which  are  more  dur- 
able. A  cargo  of  bananas  is  not  as  good  security  as 
a  cargo  of  grain. 

LACK  OF  TITLE  IN  SHIPPER.— A  third  risk, 
which  any  one  who  takes  a  bill  of  lading  runs,  is  lack 
of  title  to  the  goods  in  the  shipper.  Suppose  the 
shipper  stole  the  goods  and  brought  them  to  the  car- 
rier and  demanded  and  received  an  order  bill  of  lading. 
That  looks  like  as  good  a  bill  of  lading  as  any,  and  the 


COMMERCIAL    LAW  363 

goods  may  be  all  right,  but  the  holder  of  the  bill  of 
lading  cannot  keep  the  goods.  They  still  belong  to 
the  original  owner  from  whom  the  shipper  stole  them. 
SPENT  BILLS.— A  fourth  risk  is  that  the  bill 
of  lading  may  be  a  "spent  bill,"  as  it  is  called.  A  spent 
bill  is  one  where  the  goods  have  been  delivered  by  the 
carrier  at  destination,  but  the  bill  of  lading  has  not 
been  taken  up.  A  bill  of  lading  is  unlike  a  note  in  this 
respect — it  has  no  date  of  maturity.  When  you  buy  a 
promissory  note  you  can  guess  whether  it  has  been 
dishonored  or  not,  by  whether  the  time  for  perform- 
ance has  come  or  not ;  but  if  a  bill  of  lading  for  a  cargo 
of  goods  is  offered  to  you,  you  have  no  means  of  tell- 
ing whether  the  cargo  arrived  the  day  before  or 
whether  the  goods  have  been  removed.  Of  course, 
the  carrier  ought  to  take  up  an  order  bill  of  lading 
when  the  goods  are  delivered,  and  in  the  Uniform  Bills 
of  Lading  Act  that  requirement  is  made,  and  the  car- 
rier is  made  liable  on  the  bill  if  it  is  left  outstanding 
and  is  purchased  by  a  bona  fide  purchaser  for  value, 
who  supposes  that  the  goods  are  still  in  transit.  This 
trouble  with  spent  bills  is  not  so  likely  to  arise  as  a 
corresponding  difficulty  with  what  may  be  called  "par- 
tially spent  bills."  It  is  not  uncommon  for  partial 
delivery  to  be  made  and  the  bill  of  lading  still  left  in 
the  hands  of  the  holder.  Commonly,  when  all  the 
goods  are  delivered,  the  bill  of  lading  is  taken  up,  but 
when  part  is  delivered  the  carrier  does  not  feel  justi- 
fied, and  indeed  is  not  justified,  in  demanding  the  sur- 
render of  the  bill.  What  ought  to  be  done,  of  course, 
is  to  indorse  on  the  bill  of  lading  the  fact  that  part  of 


364  COMMERCIAL   LAW 

the  goods  has  been  delivered,  with  a  specification  of 
the  part.  This  also  is  required  by  the  bill  of  lading 
statute,  and  a  carrier  is  made  liable  for  failure  to  in- 
dorse on  a  bill  of  lading  the  fact  that  part  of  the  goods 
described  therein  has  been  delivered. 

LACK  OF  TITLE  TO  BILLS  OF  LADING.— 
A  fifth  risk,  which  one  who  buys  or  lends  money  on 
bills  of  lading  runs,  is  the  chance  that  the  person  from 
whom  he  takes  a  bill  of  lading  may  not  have  title  to  it. 
This  risk  is  the  same  that  one  runs  in  regard  to  nego- 
tiable paper.  If  an  indorsement  is  forged,  or  if  for  any 
reason  the  holder  of  a  bill  of  lading — or  for  that  mat- 
ter of  a  bill  of  exchange — cannot  give  a  good  title  to 
it,  one  who  purchases  from  him  will  not  get  a  good 
title. 

MEANING  OF  NEGOTIABILITY.— The  ex- 
tent of  this  risk  depends  somewhat  on  the  degree  of 
negotiability  which  is  given  to  bills  of  lading,  and 
requires  an  understanding  of  what  negotiability 
means.  Ordinarily,  one  who  buys  a  contract  right 
gets  no  better  right  than  has  the  person  from  whom 
he  buys  it.  On  the  other  hand,  though  one  who  buys 
chattel  property  capable  of  delivery,  like  a  horse  or  a 
book,  does  not  get  title  if  the  person  who  sold  it  to 
him  had  no  legal  title,  yet  a  purchaser  does  get  a  good 
title  to  such  property  if  he  buys,  in  good  faith  and  for 
value,  from  a  person  who  has  legal  title  though  not 
an  equitable  title.  You  will  see  this  best  by  an  illus- 
tration. If  a  fraudulent  person  has  a  contract  right 
assigned  to  him  by  fraud,  and  then  sells  the  contract 
right  to  a  bona  fide  purchaser,  the  bona  fide  purchaser 


COMMERCIAL   LAW  365 

gets  no  greater  right  than  the  fraudulent  person  has; 
in  other  words,  he  cannot  collect  on  the  claim  which 
he  has  obtained.  On  the  other  hand,  if  a  fraudulent 
person  has  assigned  to  him,  by  fraud,  a  horse  or  a 
book,  the  legal  title  to  which  was  in  the  assignor,  he 
has  acquired  the  legal  title,  and  though  he  is  subject 
to  an  equity,  as  the  phrase  is,  and  the  horse  or  the 
book  could  be  taken  away  from  him  by  the  defrauded 
person,  if  he  could  act  quickly  enough,  yet  a  purchaser 
for  value,  without  notice  of  fraud,  will  get  an  inde- 
feasible legal  and  equitable  title  to  the  horse  or  the 
book. 

Negotiable  paper — like  bills  of  exchange  and 
promissory  notes — is  subject  to  the  same  rule  as  the 
horse  or  book,  and  is  not  subject  to  the  same  rule  as  or- 
dinary contract  rights;  that  is,  a  purchaser  in  good 
faith  of  an  order  bill  of  lading  from  a  vendor  having 
legal  title  thereto,  will  get  title  to  it  and  to  the  goods 
behind  it,  in  spite  of  the  fact  that  the  person  from 
whom  the  bill  of  lading  was  bought  had  obtained  title 
by  fraud,  and  could  have  had  the  bill  of  lading,  or  the 
goods  behind  it,  taken  away  from  him  by  the  person 
defrauded. 

Another  feature  of  negotiability  is  that  the  terms 
of  the  instrument,  on  the  face  and  back,  are  regarded 
as  definitely  showing  the  title.  If  the  instrument  is 
made  to  A's  order,  A  has  power  by  indorsement  to 
give  a  good  title,  whatever  may  have  been  the  reason 
the  instrument  was  made  payable  to  A,  and  even 
though  it  was  agreed  by  the  original  parties  that  A 
should  be  merely  an  agent  and  have  no  title  or  right 


366  COMMERCIAL    LAW 

to  transfer.  If  the  instrument  is  made  out  on  its  face 
to  bearer,  or  is  indorsed  in  blank  by  the  person  to 
whom  it  is  made  out  on  the  face,  anyone  acting  in  good 
faith  may  treat  the  holder  as  the  owner  and  acquire 
a  good  title  from  him,  though  in  fact  the  holder  may 
not  have  had  a  good  title.  Under  the  Uniform  Bills 
of  Lading  Act,  and  under  some  other  local  statutes, 
bills  of  lading  running  to  order  are  given  full  nego- 
tiability, but  in  many  States  they  are  only  partially 
negotiable. 

INDORSEMENT  OF  BILLS  OF  LADING.— 
Order  bills  of  lading  need,  for  their  negotiation,  in- 
dorsement by  the  consignee,  just  as  a  promissory  note 
needs  indorsement  by  the  payee.  But  there  is  one  dif- 
ference between  the  indorsement  of  a  bill  of  lading,  it 
may  be  said  in  passing,  and  the  indorsement  of  a  prom- 
issory note.  The  indorser  of  a  bill  of  lading  incurs  no 
liability  by  his  indorsement.  His  indorsement  is  sim- 
ply a  transfer.  If  it  turns  out  that  the  bill  of  lading 
is  not  honored  by  the  carrier,  the  holder  of  an  indorsed 
bill  of  lading  cannot  come  back  on  the  indorser  in  the 
way  that  the  holder  of  a  promissory  note  can  come 
back  on  the  indorser  if  the  maker  fails  to  pay. 

FORGED  BILLS  OF  LADING.— One  final  risk 
in  regard  to  bills  of  lading  is  that  the  bill  of  lading 
may  be  forged  or  altered,  and  this  has  in  practice 
proved  the  most  serious  risk  of  all.  There  have  been, 
in  times  past,  several  sets  of  frauds  created  by  forged 
bills  of  lading.  One  of  the  largest  is  known  as  the 
Knight-Yancey  frauds  which  originated  in  Alabama. 
A  cotton  firm  named  Knight,  Yancey  &  Co.  forged  a 


COMMERCIAL    LAW  367 

quantity  of  bills  of  lading  and  obtained  a  very  large 
amount  of  money  from  banks.  A  circumstance  that 
renders  forgery  easier  in  the  case  of  bills  of  lading 
than  in  the  case  of  any  other  valuable  document,  such 
as  a  check  or  a  stock  certificate,  is  the  carelessness 
with  which  bills  of  lading  have  been  made  out.  It  is 
really  incredible,  the  carelessness  with  which  this  has 
been  done.  Documents  which  represent  a  value  of 
many  thousands  of  dollars  are  scribbled  hastily,  in 
pencil  sometimes,  on  forms  that  are  accessible  to  any- 
body. The  forgeries  that  have  taken  place  have  called 
attention  to  this  evil,  and  at  the  present  time  there  is 
more  care  exercised  in  making  out  order  bills  than 
was  the  case  a  few  years  ago ;  but  even  to-day  an  order 
bill  of  lading  is  made  out  with  no  special  precautions 
against  forgery.  The  forms  can  be  obtained  at  any 
railroad  station,  and  it  is  simply  a  question  of  copying 
writing,  no  devices  of  perforating  or  serial  numbers 
or  things  of  that  sort  being  ordinarily  used. 

DEVICES  TO  PREVENT  FORGERY.— In 
order  to  meet  this  risk  several  devices  have  been  sug- 
gested. One  which  has  been  urged  upon  Congress  is 
to  pay  the  railroads  a  special  small  fee  for  issuing  or- 
der bills  with  the  precautions  that  a  stock  certificate  is 
issued.  The  railroad  would  take  the  blank  from  a 
numbered  book  and  would  punch  and  stamp  it  in  such 
ways  and  with  such  countersigning  that  it  would  be 
very  difficult  to  forge.  That  method  has  not  found 
much  favor  with  shippers  because  they  dislike  the 
extra  expense.  They  get  their  order  bills  of  lading  for 
nothing  now,  and  they  want  to  continue  to  do  so. 


368  COMMERCIAL    LAW 

Another  project  is  to  make  some  sort  of  central  clear- 
ing house  to  which  shall  be  reported  all  order  bills  of 
lading  as  they  are  issued,  so  that  it  will  be  known 
whether  there  is  outstanding  a  document  correspond- 
ing to  one  that  is  offered  to  a  bank  for  security.  This 
method  is  to  some  extent  in  use. 

ALTERATION  OF  BILLS  OF  LADING.— 
Alteration  of  a  genuine  bill  may  be  as  damaging  as  the 
out  and  out  forgery  of  a  new  one.  This  case  occurred 
in  Maryland  some  years  ago :  a  man  who  had  always 
been  in  good  repute  had  a  line  of  credit  at  the  bank, 
where  he  kept,  as  security,  bills  of  lading.  He  was 
allowed  to  change  these  as  he  wanted  to,  putting  in 
sufficient  collateral  always  to  cover  what  he  took  out. 
The  railroad  and  steamboat  lines  with  which  he  did 
business  neglected  in  some  instances  to  take  up  the 
bills  of  lading  which  he  presented  for  shipments.  They 
habitually  did  not  take  up  the  straight  bills,  and  that 
is  not  required  by  law,  and  sometimes  they  did  not 
take  up  the  order  bills.  When  this  man  got  hard 
pressed  he  took  some  old  order  bills,  which  he  still 
had  in  his  possession,  and  changed  the  dates ;  then  he 
took  some  straight  bills  which  he  had  in  his  posses- 
sion and  changed  the  date  of  those,  and  also  added 
the  words  "or  order'*  to  the  name  of  himself  as  con- 
signee. Then,  after  indorsing  those  they  looked  good. 
He  took  those  altered  bills  to  his  bank  and  substituted 
them  for  genuine  bills,  and  when  the  fraud  was  found 
out  the  bank  found  itself  with  about  $100,000  of  al- 
tered bills  of  lading.  The  carrier  was  held  liable  on 
the  order  bills,  even  though  they  had  been  altered, 


COMMERCIAL   LAW  369 

because  it  should  have  taken  them  up,  but  on  the 
straight  bills,  which  were  a  great  part  of  the  whole, 
the  bank  lost.  Of  course,  they  were  still  legally 
straight  bills,  although  the  holder  had  written  "or 
order"  on  them.  That  fraud  led  to  one  protection 
being  made  in  the  uniform  bill  of  lading  recom- 
mended by  the  Interstate  Commerce  Commission. 
The  uniform  form  of  order  bill  has  the  words  "order 
of"  printed  in  front  of  the  blank  for  the  consignee's 
name,  so  that  a  straight  bill  cannot  be  made  into  an 
order  bill  by  adding  "or  order."  Moreover,  the  differ- 
ence in  color,  between  order  and  straight  bills  now 
gives  a  protection  as  to  domestic  bills;  not  as  to  for- 
eign bills,  however.  If  a  bill  is  altered  fraudulently 
the  bill  is  worth  just  as  much  and  just  as  little  as  it 
would  have  been  worth  if  no  alteration  had  been 
made ;  that  is,  the  alteration,  not  the  bill  itself,  is  void. 
ATTACHMENT  OF  GOODS  IN  TRANSIT.— 
There  is  one  other  risk  in  regard  to  bills  of  lading 
which  no  longer  exists  where  the  Uniform  Bills  of 
Lading  Act  is  in  force,  and  that  is  seizure  by  attach- 
ment for  the  benefit  of  some  creditor.  The  bills  of 
lading  act  provides  that  when  there  is  an  order  bill 
outstanding,  against  goods  shipped  by  a  carrier,  there 
can  be  neither  attachment  by  a  creditor  nor  stoppage 
in  transit  by  the  seller  if  unpaid.  Where  the  uniform 
statute  has  not  been  passed,  the  matter  is  not  so  clear. 
Undoubtedly  one  who  purchased  for  value  or  lent 
money  on  an  order  bill  would  be  protected  against 
later  attachments  by  creditors  of  the  former  owner 
of  the  bill;  but  if  creditors  of  the  former  owner  had 


370  COMMERCIAL    LAW 

attached  the  goods  prior  to  the  transfer  of  the  bill,  the 
attachment  would  generally  be  held  good,  though  the 
man  purchasing  or  lending  money  on  the  bill  knew 
nothing  of  the  attachment. 

WAREHOUSE  RECEIPTS  ARE  SIMILAR 
TO  BILLS  OF  LADING.— To  what  has  been  said  in 
regard  to  bills  of  lading  a  few  words  in  regard  to  ware- 
house receipts  may  be  added.  Warehouse  receipts  are 
entirely  similar  in  character  to  bills  of  lading,  and 
what  has  been  said  in  regard  to  them  is,  in  general, 
applicable  to  warehouse  receipts.  There  is  a  Uniform 
Warehouse  Receipts  Act  which  is  similar  in  its  provi- 
sions to  the  Uniform  Bills  of  Lading  Act,  and  the 
Warehouse  Receipts  Act  has  been  enacted  in  a  major- 
ity of  the  States.  Warehouse  receipts  may  be,  in  form, 
order  or  straight.  They  are  simpler  in  form,  ordi- 
narily, than  bills  of  lading,  because  they  do  not  have 
so  many  special  stipulations  and  conditions,  but  in 
other  respects  they  are  practically  identical.  The  risks 
that  one  who  deals  in  them  runs  are  the  same  in  their 
nature  as  in  the  case  of  bills  of  lading.  There  is  one 
circumstance,  however,  in  regard  to  warehouse  re- 
ceipts that  gives  one  a  better  chance  to  protect  him- 
self than  in  bills  of  lading.  Warehouse  receipts  are 
generally  used  as  collateral  and  for  purchase  and  sale 
in  the  city  where  the  goods  are  stored.  It  is  therefore 
possible  to  telephone  to  the  warehouseman  or  other- 
wise to  assure  oneself  of  the  existence  of  the  goods  in 
a  way  that  is  not  possible  under  the  bill  of  lading, 
where  the  goods  are  in  transit.  The  warehouse  re- 
ceipt, even  less  than  a  bill  of  lading,  has  a  day  of  ma- 


COMMERCIAL    LAW  371 

turity.  A  bill  of  lading,  as  we  have  seen,  has  no  par- 
ticular day  on  which  it  is  evident  to  a  purchaser  that 
it  has  finished  its  work,  and  that  is  even  more  true  in 
a  warehouse  receipt.  The  fact  that  a  warehouse  re- 
ceipt is  pretty  old  does  not  necessarily  show  that  the 
document  is  not  a  perfectly  good  document  and  that 
the  goods  are  not  there. 

OPEN  RECEIPTS.— There  is  one  way  of  doing 
business  with  warehouse  receipts  which  is  different 
from  anything  that  takes  place  with  bills  of  lading, 
and  which  has  been  a  subject  of  criticism,  and  which 
deserves  criticism ;  this  is  the  practice  of  issuing  what 
are  called  open  receipts.  In  an  open  receipt  the  ware- 
houseman acknowledges  he  has  received  a  certain 
quantity  of  things  of  a  certain  sort,  and  will  redeliver 
that  quantity  of  things  of  that  sort;  but  not  neces- 
sarily the  identical  things  that  were  deposited.  It  is 
contemplated  that  the  depositor  shall  have  the  right 
to  substitute  from  time  to  time,  for  the  goods  orig- 
inally deposited,  other  goods  of  like  kind  and  quan- 
tity; that  is,  a  receipt  may  be  issued  for  100  bales  of 
burlap.  The  depositor  who  deals  in  burlap  wants  to 
use  some  of  the  bales  that  are  in  storage.  He  has 
pledged  his  warehouse  receipt,  which  he  originally 
received  for  the  100  bales  of  burlap,  and  he  cannot 
surrender  that,  but  he  wants  the  warehouseman  to  let 
him  take  out  25  bales  of  the  old  burlap  and  put  in  25 
bales  of  new,  and  that  is  sometimes  allowed.  It  seems 
a  very  unsafe  practice.  It  is  unsafe,  for  one  who  lends 
on  warehouse  receipts,  to  allow  the  depositor  and  the 
warehouseman  to  agree  between  themselves  as  to 


372  COMMERCIAL    LAW 

what  shall  be  a  sufficient  substitution  for  goods  which 
are  the  bank's  collateral.  Moreover,  it  is  unsafe  for  the 
warehouseman,  because  if  the  holder  of  the  warehouse 
receipt  has  not  really  consented  to  the  substitution, 
or  unless  the  form  of  warehouse  receipt  clearly  shows 
that  substitution  is  contemplated,  the  warehouseman 
would  be  liable  to  the  holder  of  the  receipt  if  the  sub- 
stituted goods  turn  out  to  be  inferior  to  those  which 
were  originally  deposited. 

WAREHOUSEMAN  IS  A  BAILEE  FOR 
HIRE. — A  warehouseman  is  a  bailee  for  hire,  and  a 
bailee  for  hire  is  liable  for  neglect  if  the  goods  are 
destroyed  or  injured  by  his  negligence.  He  is  not 
an  insurer.  The  ordinary  bailee  for  hire  is  not  sub- 
ject to  the  extraordinary  liability  to  which  a  carrier  is 
subjected  while  goods  are  in  transit. 

SAFE  DEPOSIT  COMPANIES  ARE 
BAILEES  FOR  HIRE.— There  is  one  special  kind 
of  bailee,  in  regard  to  whom  it  may  be  worth  while  to 
say  a  few  words  particularly,  and  that  is  a  safe  de- 
posit company.  It  has  been  questioned  whether  a  safe 
deposit  company  is  properly  a  bailee  of  the  goods  in 
the  boxes  to  which  the  safe  deposit  company  does  not 
have  access.  It  is  simply  in  control  of  the  general 
premises,  and,  furthermore,  the  holder  of  the  boxes 
cannot  have  access  to  what  is  inside  the  boxes  with- 
out the  assistance  of  the  safe  deposit  company.  There 
is,  therefore,  a  sort  of  joint  possession.  The  safe  de- 
posit company  and  the  depositor  who  hired  the  box 
have  together  the  full  control  of  the  goods,  but  neither 
one  of  them  alone  has  it.    It  has  been  suggested  that 


COMMERCIAL   LAW  373 

the  safe  deposit  company  is  merely  a  sort  of  watch- 
man ;  that  it  is  guarding  property  of  which  it  is  not  in 
possession.  But  it  is  doing  a  little  more  than  guard- 
ing, and  it  is  generally  held  to  be  a  bailee  for  hire ;  that 
means  it  must  take  reasonable  care  of  the  goods  in 
its  possession. 

LIABILITY  OF  SAFE  DEPOSIT  COMPA- 
NIES FOR  LOSS  OF  GOODS.—There  are  a  num- 
ber of  cases,  not  a  great  many,  but  still  some,  where 
safe  deposit  companies  have  been  sued  for  goods 
which  were  missing,  or  which  the  depositor  sv/ore 
were  missing,  from  his  box.  If  the  court  or  jury  is 
convinced  that  the  goods  have  been  lost  from  the  box, 
the  burden  of  explanation  as  to  how  it  happened  would 
be  upon  the  safe  deposit  company.  The  safe  deposit 
company  is  liable  for  the  acts  of  its  servants  and 
agents.  Of  course,  then,  carelessness  in  regard  to 
duplicate  keys  of  any  of  the  boxes  might  render  a 
safe  deposit  company  subject  to  suit  if  loss  occurs 
thereby. 

LIABILITY  OF  DEPOSITED  GOODS  TO 
GARNISHMENT.— One  of  the  most  important 
questions  in  regard  to  safe  deposit  companies  is  this : 
Are  the  goods  in  the  safes  subject  to  legal  process? 
Suppose  a  safe  deposit  company  is  garnisheed  (that 
is  served  with  a  trustee  writ)  in  a  suit  against  some 
one  who  has  a  box;  can  the  company  answer  that  it 
has  no  funds  or  goods  of  the  defendant  in  its  posses- 
sion? Yes,  it  may;  it  cannot  control  the  goods  and  it 
may  answer,  no  funds.  One  case,  however,  must  be 
distinguished,  and  that  is  where  a  bank  or  a  safe  de- 


374  COMMERCIAL    LAW 

posit  company  has  a  separate  trunk  or  box  of  a  de- 
positor in  its  possession.  If  it  has  that  separate  box, 
even  though  it  is  locked,  and  the  bank  has  not  the  key, 
the  bank  cannot  answer  no  funds;  it  must  answer 
that  it  has  a  box  the  contents  of  which  are  unknown 
to  it.  A  box,  however,  shut  up  in  a  safe  deposit  vault, 
that  is,  one  of  the  regular  tin  safes,  cannot  be  reached 
by  the  safe  deposit  company  in  the  normal  course  of 
affairs,  unless  the  depositor  unlocks  his  lock.  That  is 
the  reason  for  distinguishing  between  such  a  box  and 
an  ordinary  box  or  trunk  which  is  not  itself  enclosed 
in  something,  to  which  the  bank  or  safe  deposit  com- 
pany does  not  have  access. 

LIABILITY  OF  DEPOSITED  GOODS  TO 
ATTACHMENT.— Whether  property  in  a  safe  de- 
posit company  is  liable  on  a  writ  of  attachment  in  a 
suit  against  the  owner,  is  not  so  clear.  It  has  been 
held  in  one  case  that  it  is  so  liable,  and  that  the  officer 
has  a  right  to  go  in  and  seize  the  goods.  This  will  not 
often  be  attempted,  however,  because  the  officer  will 
not  know  in  what  box  the  debtor  might  have  goods, 
and  the  safe  deposit  company  will  not  tell  him.  The 
company  is  certainly  under  no  obligation  to  help  the 
officer.  The  regular  way  for  a  creditor  to  get  at  the 
goods  of  his  debtor,  concealed  in  the  safe  deposit  box, 
is  by  first  making  the  debtor  disclose  on  examination 
in  court  what  property  he  has,  and  then  getting  an 
order  from  the  court  that  the  debtor  shall  turn  over 
what  he  has  disclosed.  This  he  must  do  or  be  impris- 
oned until  he  does.  There  is  only  one  difficulty 
with  this  remedy,  and  that  is  that  the  debtor  may 


COMMERCIAL    LAW  375 

have  an  infirm  memory — in  other  words,  he  may  com- 
mit perjury;  he  may  have  something  in  the  box  and 
not  disclose  the  fact. 

SEARCH  FOR  STOLEN  PROPERTY.— If 
stolen  property  were  sought,  a  search  warrant  de- 
scribing the  property  might  be  presented  to  the  safe 
deposit  company,  and  it  would  have  to  permit  the  offi- 
cer of  the  law  to  make  the  search  for  the  goods  de- 
scribed, but  only  for  goods  described  in  the  search 
warrant.  There  is  a  case  in  New  York  where,  on  a 
search  warrant  for  certain  articles,  the  officer  of  a  safe 
deposit  company  allowed  the  officer  of  the  law  to  make 
a  general  examination  of  goods  in  its  possession,  and 
to  remove  some  bonds  which  were  not  specified  in  the 
search  warrant.  The  safe  deposit  company  was  held 
liable. 

DEATH  OF  DEPOSITOR.  —  The  question 
often  arises :  What  is  the  situation  on  the  death  of  the 
owner  or  renter  of  a  safe?  It  is  the  same  as  in  the  case 
of  the  death  of  any  bailor  or  depositor.  The  bailee 
must  recognize  the  title  only  of  the  person  who  is 
appointed  by  law  as  the  successor  in  interest  to  the 
deceased  person.  The  safe  deposit  company  has  the 
right,  and  should  exercise  it,  to  demand  proofs  and 
identifications  of  persons  who  claim  rights  as  repre- 
senting deceased  persons.  Sometimes  a  dispute  arises 
between  joint  owners  of  a  box.  In  that  case  the  only 
safe  course  for  a  safe  deposit  company  would  be  to 
recognize  the  right  of  none  until  it  had  been  passed 
on  by  the  court.  What  is  called  a  bill  of  interpleader, 
to  determine  which  one  has  the  right,  should  be  filed 


376  COMMERCIAL    LAW 

in  court,  unless  the  conflicting  interests  can  agree  or 
one  of  them  gives  a  bond  to  the  company  to  insure  its 
freedom  from  liability  if  it  delivers  the  goods  to  him. 

SAFE  DEPOSIT  COMPANY  HAS  NO  LIEN. 
— A  safe  deposit  company  has  no  lien  on  the  contents 
of  a  box  for  anything  due  to  it.  In  that  respect  it  is 
different  from  an  ordinary  warehouseman  and  a  car- 
rier, who  have  a  lien  on  the  goods  in  their  possession 
for  their  charges.  The  reason  is  that  a  safe  deposit 
company  is  not  in  such  possession  of  the  contents  of 
a  box  as  to  give  it  a  lien.  If  the  renter  of  the  box  does 
not  pay  his  bills,  however,  the  company  has  the  right 
to  open  the  box  and  remove  its  contents,  keeping  them 
safe  for  the  owner. 

GIFT  OF  GOODS  IN  A  SAFE  DEPOSIT 
BOX. — It  was  held  in  a  case,  decided  in  the  State  of 
Illinois,  that  the  gift  of  the  keys  of  a  safe  deposit  box 
amounted  to  a  valid  gift  of  property  in  the  box  when 
made  with  that  intention.  In  order  to  make  a  good 
gift  there  must  be  a  valid  delivery,  and  it  was  held 
that  the  delivery  of  the  keys  amounted  to  a  symbolic 
delivery  of  the  contents  of  the  box. 

RIGHT  OF  SAFE  DEPOSIT  COMPANY  TO 
SUE  FOR  GOODS  WRONGFULLY  TAKEN.— 
If  goods  are  wrongfully  removed  from  the  box  of  a 
depositor,  the  safe  deposit  company  has  a  right  to 
reclaim  them  like  any  bailee,  for  it  is  the  law  that  if 
goods  are  taken  out  of  the  hands  of  a  carrier,  ware- 
houseman or  other  bailee  wrongfully,  the  bailee  may 
reclaim  the  goods  from  the  wrongdoer,  and  bring  an 
action  at  law  for  them,  not  as  owner,  but  because  the 


COMMERCIAL    LAW  377 

bailee  has  the  right  of  possession  to  them  while  in  his 
custody,  and  he  may  be  liable  if  he  lets  them  get  into 
the  hands  of  any  one  other  than  the  true  owner. 

LIABILITY  OF  SAFE  DEPOSIT  COMPA- 
NIES UNDER  INHERITANCE  TAX  LAWS.— 
One  case  in  regard  to  the  Illinois  inheritance  tax  law 
indicates  an  imposition  of  some  burden  on  the  safe 
deposit  company.  The  company  is  required  to  notify 
the  Attorney-General  ten  days  before  it  allows  access 
by  the  representative  of  a  deceased  person  to  his  box, 
and  under  certain  circumstances  the  safe  deposit  com- 
pany is  required  to  retain,  from  the  contents  of  the 
box,  a  sufficient  amount  to  pay  the  tax,  and  is  made 
liable  if  it  fails  to  do  so.  This  provision  was  held  con- 
stitutional by  the  Supreme  Court  of  Illinois, 


CHAPTER  XII 


Bills  and  Notes 

HISTORY.— By  the  term  "negotiable  paper,"  we 
ordinarily  mean  promissory  notes,  bills  of  ex- 
change and  checks.  The  law  governing  nego- 
tiable paper  originated  among  the  customs  of  mer- 
chants on  the  continent  of  Europe.  It  was  gradually 
introduced  into  England,  and  its  principles  grudg- 
ingly recognized  by  the  common  law  judges.  There 
is  no  branch  of  law  where  the  desirability  of  uni- 
formity is  greater,  as  these  documents  pass  from  hand 
to  hand  like  money,  and  travel  from  one  State  to  an- 
other. Naturally,  our  first  serious  attempt  at  uni- 
form legislation  was  made  in  this  branch  of  law,  and 
in  the  year  1896,  the  Commissioners  for  Uniform 
Laws  prepared  and  recommended  for  passage  the 
Uniform  Negotiable  Instruments  Law.  To-day,  every 
State,  except  Georgia,  has  passed  the  Act,  as  well  as 
the  District  of  Columbia,  Alaska,  Porto  Rico  and 
the  Philippines.  For  convenience  in  this  chapter,  we 
shall  hereafter  refer  to  this  Negotiable  Instruments 
Act  as  the  N.  I.  L. 

FORMS  OF  NEGOTIABLE  INSTRU- 
MENTS.— It  is  essential  to  carry  in  mind  the  cus- 
tomary form  of  the  negotiable  instruments  we  have 
just  mentioned.  A  promissory  note  is  defined  by  the 
N.  I.  L.  as  follows:  "A  negotiable  promissory  note 
within  the  meaning  of  this  act  is  an  unconditional 
promise  in  writing  made  by  one  person  to  another 

378 


COMMERCIAL    LAW 


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380  COMMERCIAL   LAW 

signed  by  the  maker  engaging  to  pay  on  demand,  or 
at  a  fixed  or  determinable  future  time,  a  sum  certain 
in  money  to  order  or  to  bearer." 

A  bill  of  exchange  is  defined  by  the  N.  I.  L.  as  fol- 
lows: "A  bill  of  exchange  is  an  unconditional  order 
in  writing  addressed  by  one  person  to  another,  signed 
by  the  person  giving  it,  requiring  the  person  to  whom 
it  is  addressed  to  pay  on  demand  or  at  a  fixed  or  deter- 
minable future  time  a  sum  certain  in  money  to  order 
or  to  bearer." 

A  check  is  defined  by  N.  I.  L.  as  "a  bill  of  ex- 
change drawn  on  a  bank  payable  on  demand." 

Other  documents  may  be  negotiable  in  form,  such 
as  the  ordinary  bearer  corporation  bonds,  liberty 
bonds,  certificates  of  stock,  and  bills  of  lading.  The 
principles  discussed  in  this  chapter  would  apply,  or- 
dinarily, to  these  documents,  and  are  discussed  more 
in  detail  in  the  chapters  devoted  to  them  which  we 
have  already  considered. 

WHAT  IS  NEGOTIABILITY?— Negotiabil- 
ity has  been  defined  as  that  quality  whereby  a  bill, 
note,  or  check,  passes  freely  from  hand  to  hand  like 
currency.  In  fact,  all  of  these  documents  are  substi- 
tutes for  currency,  and  so  far  as  is  practicable,  it  is 
desirable  that  they  should  pass  as  freely  as  currency. 
Negotiability  applies  only  to  this  branch  of  the  law, 
while  assignability  applies  to  ordinary  cases  of  con- 
tract law. 

ILLUSTRATIONS.— To  illustrate  the  differ- 
ence between  the  two:  Jones  worked  for  the  Balti- 
more &  Ohio  Railroad  Co.    He  presented  his  bill  of 


COMMERCIAL   LAW 


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$25, 

COMMERCIAL    LAW  383 

$100  to  the  proper  official,  and  a  check  was  issued  by 
the  railroad  payable  to  the  order  of  Jones  for  that 
amount.  Jones  took  the  check,  indorsed  it,  and  with  it 
paid  his  grocery  bill.  The  grocery  man  deposited  the 
check  in  his  bank,  and  was  notified  shortly  thereafter 
that  payment  had  been  stopped  on  the  check  by  the 
Baltimore  &  Ohio.  They  claimed  a  fraud  had  been 
committed,  that  Jones  was  overpaid  $50,  and,  there- 
fore, they  refused  to  honor  the  check.  The  grocery 
man,  having  taken  this  check  in  the  usual  course  of 
business,  is  what  we  term  a  "holder  in  due  course." 
The  N.  I.  L.  defines  a  holder  in  due  course  as: 

Section  52.  "A  holder  in  due  course  is  a  holder 
who  has  taken  the  instrument  under  the  following 
conditions:  (1)  That  it  is  complete  and  regular  upon 
its  face;  (2)  That  he  became  the  holder  of  it  before  it 
was  overdue,  and  without  notice  that  it  had  been  pre- 
viously dishonored,  if  such  was  the  fact;  (3)  That  he 
took  it  in  good  faith  and  for  value;  (4)  That  at  the 
time  it  was  negotiated  to  him  he  had  no  notice  of  any 
infirmity  in  the  instrument  or  defect  in  the  title  of 
the  person  negotiating  it." 

A  holder  in  due  course,  then,  would  be  entitled  to 
collect  the  full  $100  from  the  Baltimore  &  Ohio.  This 
check  is  governed  by  the  law  of  negotiability  with  the 
result  which  we  have  just  indicated.  Now  change  the 
facts  a  trifle.  Jones  presented  his  bill  to  the  same  offi- 
cer of  the  Baltimore  &  Ohio  as  before.  The  officer 
says  that  checks  are  made  out  regularly  on  the  first 
of  the  month.  It  was  the  fifteenth,  and  Jones  did  not 
feel  able  to  wait  until  the  first  of  the  next  month.   He 


384  COMMERCIAL   LAW 

went  to  a  friend  and  told  him  of  his  claim  against 
the  Baltimore  &  Ohio,  and  said:  "I  will  assign  this 
claim  to  you  for  $95,  and  then  you  can  present  the 
assignment,  which  I  will  draw  up  and  sign,  to  the 
Baltimore  &  Ohio  on  the  first  of  the  month,  and  get 
the  $100."  His  friend  agrees  and  advances  the  money. 
When  he  presents  the  written  assignment  to  the 
proper  officer  on  the  first  of  the  month,  he  is  told  that 
the  railroad  has  discovered  that  Jones'  claim  was 
really  good  for  only  $50,  and  that  is  all  they  will  pay. 
Although  his  assignment  reads  for  $100,  he  can  col- 
lect only  $50.  This  illustration  is  governed  by  the 
law  of  assignability,  which  applies  to  practically  all 
contracts,  apart  from  commercial  paper.  Under  the 
rules  of  assignability,  a  person  can  assign  no  better 
claim  than  he  has,  or,  as  is  sometimes  said,  the  as- 
signee stands  in  the  shoes  of  the  assignor.  Jones 
really  had  a  claim  of  only  $50  against  the  Baltimore  & 
Ohio,  although  he  claimed  it  was  $100.  He  could  as- 
sign no  more  than  he  really  had.  These  two  illustra- 
tions show  the  great  difference  in  the  result  of  the 
application  of  the  two  principles,  negotiability  and 
assignability. 

THE  FORMAL  REQUIREMENTS  OF  NE- 
GOTIABLE PAPER.— There  are  certain  formalities 
which  all  negotiable  paper  must  have.  It  must  be  in 
writing,  and  signed  by  the  proper  person.  No  form 
of  writing  is  specified  in  the  Act,  and  lead  pencil,  or 
even  slate  pencil,  is  as  good  as  ink,  except  that  in  the 
two  latter  cases  the  ease  with  which  these  forms  of 
writing  may  be  altered  makes  them  most  undesirable 


COMMERCIAL   LAW  385 

for  use.   But  there  is  no  law  requiring  the  use  of  ink. 

MUST  CONTAIN  A  PROMISE.— Every  nego- 
tiable instrument  must  contain  words  of  negotiabil- 
ity. These  words  are,  "to  order,"  "to  bearer,"  "to 
holder"  or  their  equivalent.  "I  promise  to  pay  John 
Jones,  $100,"  and  signed  "John  Smith,"  is  a  promis- 
sory note,  but  not  a  negotiable  promissory  note,  be- 
cause it  lacks  the  words  to  "order"  or  "bearer,"  and 
is  a  document  which  would,  therefore,  pass  by  the  law 
of  assignability  rather  than  the  law  of  negotiability. 
In  taking  negotiable  paper,  therefore,  it  is  always  im- 
portant to  see  whether  these  words  are  present.  If 
they  are  not,  the  holder  will  lose  the  peculiar  advan- 
tage and  rights  which  the  holder  in  due  course  ac- 
quires by  the  law  of  negotiability.  A  promissory  note 
must  contain  a  promise  and  a  bill  of  exchange  must 
contain  an  unconditional  order.  An  I.  O.  U.  for  $100 
signed  "John  Jones"  is  not  a  promissory  note,  be- 
cause there  is  no  promise  contained  in  such  a  docu- 
ment. 

UNCONDITIONAL  PROMISE.  — All  nego- 
tiable documents  must  be  payable  without  reference  to 
any  contingency.  A  note  reads :  "I  promise  to  pay  to 
the  order  of  John  Jones  $100  when  I  attain  my  twenty- 
second  birthday"  and  is  signed  by  John  Jones,  now 
twenty-one.  That  is  not  a  good  note  because  the  per- 
son may  not  live  to  be  twenty-two.  Even  if  he  lives 
to  become  twenty-two  the  note  is  still  non-negotiable, 
for  when  it  was  made  the  contingency  existed.  A  bill 
of  exchange,  regular  in  form,  but  adding  the  expres- 
sion, "If  the  Republicans  win  the  next  congressional 


386  COMMERCIAL    LAW 

election,"  is  not  negotiable.  The  one  exception,  as  it 
might  appear  at  first  sight,  is  a  negotiable  document 
reading:  "I  promise  to  pay  to  the  order  of  William 
White  six  months  after  death,"  etc.  Such  a  promise 
is  not  contingent.  Death  will  arrive  at  some  time,  al- 
though it  may  be  uncertain  just  when.  In  the  other 
illustrations  the  republicans  might  not  win  the  con- 
gressional election,  and  the  person  might  not  become 
twenty-two.  Again,  all  commercial  paper  must  be 
made  payable  in  money.  "I  promise  to  pay  to  the 
order  of  John  Jones  $100  worth  of  tobacco,'*  is  not 
negotiable.  "I  promise  to  pay  to  the  order  of  John 
Jones  $100  and  fifty  pounds  of  tobacco"  is  not  negoti- 
able. In  both  cases,  the  medium  of  payment  is  some- 
thing other  than  money. 

INCEPTION  OF  THE  INSTRUMENT  AS 
AN  OBLIGATION. — In  our  discussion  of  contracts, 
we  made  the  statement  that  a  legal  intention  to  make 
a  contract  was  necessary.  The  same  is  true  in  com- 
mercial paper.  A  man  must  intend  legally  to  issue  a 
negotiable  instrument  in  order  to  be  liable  on  one  as 
maker  or  drawer.  Thus,  in  the  case  of  Walker  v.  Ebert, 
29  Wis.  94,  the  defendant,  a  German,  unable  to  read 
and  write  English,  was  induced  by  the  payee  to  sign 
an  instrument,  in  the  form  of  a  promissory  note,  rely- 
ing on  the  false  statement  that  it  was  a  contract  ap- 
pointing the  defendant  agent  to  sell  a  patent  right. 
It  was  held  that  the  defendant  was  not  liable.  The 
instrument,  though  complete  in  form,  was  not  the 
defendant's  note  and  the  plaintiff  acquired  nothing 
by  his  purchase  of  the  paper. 


COMMERCIAL    LAW  387 

ILLUSTRATION.— We  must  contrast  this 
with  another  situation.  Suppose  I  hand  you  a  paper 
with  a  promissory  note  printed  on  it,  complete  in 
every  detail  except  your  signature.  I  ask  you  to  sign 
it.  You  sign  the  paper,  without  reading  it  over  or 
knowing  what  it  is,  and  give  it  back  to  me.  I  then 
transfer  it  to  a  person  who  takes  it  for  value,  in  good 
faith,  etc.,  or  who  is,  in  other  words,  a  holder  in  due 
course.  The  question  is,  are  you  liable  on  such  a 
document?  The  answer  is,  "Of  course,  you  are." 
You  may  say,  "I  did  not  intend  to  sign  a  promissory 
note."  The  law  answers  you  by  saying,  "You  were 
careless  in  signing  something  which  you  did  not  read 
over,  and  one  is  presumed  to  intend  the  consequences 
of  his  own  careless  acts."  Our  German  was  in  a  dif- 
ferent situation.  He  was  not  careless.  He  could  not 
read  English  and  was  obliged  to  rely  upon  someone 
to  tell  him  what  the  document  was,  and,  granting 
that  he  used  due  care  in  selecting  a  responsible  per- 
son to  explain  to  him  the  nature  of  the  document,  he 
had  done  all  the  law  required.  Had  he  been  imposed 
upon,  on  several  previous  occasions,  by  the  same  per- 
son who  told  him  what  the  document  was,  and  in 
spite  of  that,  had  relied  on  him  to  explain  this  docu- 
ment, then,  undoubtedly,  the  court  would  have  held 
otherwise  and  he  would  have  been  liable  on  the 
ground  that  he  must  have  intended  the  consequences 
of  his  negligent  acts,  he  being  deemed  negligent 
when  he  trusts  a  person  who  had  not  only  misrepre- 
sented things  to  him  but  had  actually  defrauded  him 
several  times. 


388  COMMERCIAL   LAW 

DELIVERY. — A  note  found  among  the  maker's 
papers,  after  his  death,  imposes  no  obligation  either 
upon  him  or  upon  his  estate.  In  other  words,  in  addi- 
tion to  the  intentional  signing  of  the  document,  to 
complete  its  validity,  there  must  also  have  been  what 
we  call  delivery.  This  is  a  passing  out  of  the  posses- 
sion of  the  maker  or  drawer,  of  the  document,  into 
the  hands  of  some  third  party.  Delivery  may  be  made 
in  three  ways:  (1)  By  intention;  (2)  By  fraud;  (3)  By 
negligence. 

A  VALID  DELIVERY  NECESSARY.— I  hand 
you  my  promissory  note  and  you  take  it.  That,  of 
course,  is  an  intentional  delivery.  You  tell  me  that 
you  have  a  fine  watch  which  I  decide  to  buy,  and  I 
give  you  my  promissory  note  in  payment.  After- 
wards, upon  examining  the  watch,  I  find  that  it  is 
worthless  and  entirely  different  from  your  description. 
You  have  secured  the  note  from  me  in  that  case  by 
fraud,  or  there  is,  as  we  say,  a  delivery  procured  by 
fraud.  I  am  sitting  on  a  bench  in  Central  Park,  and  I 
take  out  of  my  pocket  a  completed  promissory  note 
and  look  at  it  and  place  it  upon  the  bench.  V/hen  I 
leave  I  forget  it  and  it  stays  there  until  someone  comes 
along  and  picks  it  up.  That  is  a  delivery  by  negli- 
gence. All  these  forms  of  delivery  are  valid,  making 
the  documents  good,  some  in  the  hands  of  all  parties, 
others  in  the  hands  of  the  holder  in  due  course  only. 
The  N.  I.  L.  is  so  clear  upon  this  matter  that  refer- 
ence must  be  made  to  sections  15  and  16.  For  this 
reason  both  of  these  sections  are  reproduced  here  in 
full: 


COMMERCIAL    LAW  389 

Section  15.  "Where  an  incomplete  instrument  has 
not  been  delivered  it  will  not,  if  completed  and  negoti- 
ated, without  authority,  be  a  valid  contract  in  the 
hands  of  any  holder,  as  against  any  person  whose  sig- 
nature was  placed  thereon  before  delivery." 

Section  16.  "Every  contract  on  a  negotiable  in- 
strument is  incomplete  and  revocable  until  delivery  of 
the  instrument  for  the  purpose  of  giving  effect  there- 
to. As  between  immediate  parties,  and  as  regards  a 
remote  party  other  than  a  holder  in  due  course,  the  de- 
livery, in  order  to  be  effectual,  must  be  made  either  by 
or  under  the  authority  of  the  party  making,  drawing, 
accepting  or  indorsing,  as  the  case  may  be ;  and  in  such 
case  the  delivery  may  be  shown  to  have  been  condi- 
tional, or  for  a  special  purpose  only,  and  not  for  the 
purpose  of  transferring  the  property  in  the  instru- 
ment. But  where  the  instrument  is  in  the  hands  of  a 
holder  in  due  course,  a  valid  delivery  thereof  by  all 
parties  prior  to  him  so  as  to  make  them  liable  to  him 
is  conclusively  presumed.  And  where  the  instrument 
is  no  longer  in  the  possession  of  a  party  whose  signa- 
ture appears  thereon,  a  valid  and  intentional  delivery 
by  him  is  presumed  until  the  contrary  is  proved." 

DISTINGUISHING  FEATURES.— It  is  very 
important  to  distinguish  between  these  two  sections. 
Let  us  take  for  illustration  the  famous  case  of  Baxen- 
dale  V.  Bennett,  3  Q.B.Div.  525.  Here  the  defendant 
wrote  his  signature  as  acceptor  on  several  printed 
blank  forms  of  bills  of  exchange  and  left  them  in  a 
drawer  of  his  desk.  The  blanks  were  stolen,  filled  out, 
and  negotiated  to  the  plaintiff,  an  innocent  purchaser. 


390  COMMERCIAL    LAW 

It  was  held  that  the  plaintiff  could  not  recover.  The 
reason  for  this  decision  is  that  the  document  was  in- 
complete and  as  the  Act  says:  "Where  an  incomplete 
instrument  has  not  been  delivered  it  will  not,  if  com- 
pleted and  negotiated,  without  authority,  be  a  valid 
contract  in  the  hands  of  any  holder,  as  against  any  per- 
son whose  signature  was  placed  thereon  before  de- 
livery." On  the  other  hand,  if  I  leave  in  my  safe, 
checks  which  I  have  signed  and  made  out  in  full  and 
they  are  payable  to  bearer,  although  a  thief  breaks  in 
and  steals  the  checks  from  the  safe,  those  documents 
will  be  valid  in  the  hands  of  a  holder  in  due  course. 
The  reason  here  is  that  although  there  has  been  no 
delivery,  either  by  intention  or  by  fraud  or  by  negli- 
gence, nevertheless,  the  Negotiable  Instruments  Act 
has  extended  this  theory  of  delivery,  even  further 
than  the  law  went  before  the  Act  was  passed,  and  says 
that  when  the  document  is  in  the  hands  of  a  holder 
in  due  course,  a  delivery  is  conclusively  presumed. 

CONSIDERATION.— Another  essential  in  the 
inception  of  the  instrument  is  consideration.  We  have 
already  discussed  this  topic  in  the  chapter  on  con- 
tracts. We  made  the  statement  at  the  beginning  of 
this  chapter  that  the  law  of  negotiable  paper  came 
from  the  continent  of  Europe  and  was  grudgingly  re- 
ceived by  the  courts  of  England.  The  law  of  negoti- 
able paper  on  the  continent  of  Europe  did  not  have 
any  idea  of  consideration,  and  this  is  one  reason  why 
the  law  was  reluctantly  admitted  to  the  English  com- 
mon law  and  explains  the  reason  now  why  we  have 
the  doctrine  of  consideration  in  negotiable  paper.    It 


COMMERCIAL    LAW  391 

would  not  be  safe  for  the  student  to  accept  all  we  have 
said  in  regard  to  consideration  in  the  chapter  on  con- 
tracts and  apply  it  to  negotiable  paper.  The  differ- 
ence is  at  once  apparent  when  you  read  Sections  24 
and  28  of  the  Negotiable  Instrument  Act  which  read: 

Section  24.  **Every  negotiable  instrument  is 
deemed  prima  facie  to  have  been  issued  for  a  valuable 
consideration;  and  every  person  whose  signature  ap- 
pears thereon  to  have  become  a  party  thereto  for 
value." 

Section  28.  "Absence  or  failure  of  consideration 
is  a  matter  of  defence  as  against  a  person  not  a  holder 
in  due  course." 

So,  we  see,  that  in  the  general  law  of  contracts, 
consideration  is  absolutely  essential  to  a  binding  con- 
tract but  in  the  law  of  negotiable  paper,  consideration 
is  not  absolutely  essential  except  when  you  are  deal- 
ing with  the  immediate  parties.  An  illustration  will 
explain  this.  I  wish  to  make  you  a  present  on  your  next 
birthday  which  is  January  12.  To-day,  September  15, 
I  give  you  my  promissory  note  due  on  your  birthday 
for  $50.  This  is  to  be  my  present  to  you.  You  take 
the  note  and  then  hold  it  until  your  birthday  arrives 
and  I  do  not  pay  it.  Then  you  sue  me  on  the  note. 
You  cannot  recover  anything  because  there  was  no 
consideration  for  the  note  and  the  absence  of  consid- 
eration is  a  perfectly  good  defence  between  you  and 
me,  whom  the  law  calls  the  immediate  parties.  But, 
suppose,  instead  of  doing  this,  you  had  kept  the  note 
about  six  weeks  and  then  had  taken  it  to  your  bank 
and  asked  them  if  they  would  discount  the  note  for 


392  COMMERCIAL    LAW 

you  and  they  had  done  so,  taking  it  in  absolutely  good 
faith.  They  know  me  to  be  a  responsible  party,  so 
they  are  willing  to  accept  my  promissory  note.  They 
knev/  you  and  they  presumed  that  you  had  taken  the 
note  for  a  valuable  consideration  although,  as  a  matter 
of  fact,  it  was  a  gift  to  you.  Under  the  circumstances, 
the  bank  is  a  holder  in  due  course  and  when  the  note 
becomes  due,  if  I  do  not  pay,  the  bank  will  sue  me  and 
will  collect  from  me  because,  as  the  Act  says,  "the 
failure  of  consideration  is  a  matter  of  defence  as 
against  any  person  not  a  holder  in  due  course."  But 
the  bank  is  a  holder  in  due  course. 

ACCEPTANCE  OF  BILLS  OF  EXCHANGE. 
— The  holder  of  a  bill  of  exchange  will  take  it,  soon 
after  receiving  it,  to  the  drawee,  the  person  upon 
whom  it  is  drawn,  for  his  acceptance.  The  drawee 
will  accept  it  by  writing  across  the  face  of  it  "Ac- 
cepted," signing  his  name  and  perhaps  adding  "Pay- 
able at  the  First  National  Bank."  A  form  of  bill  of  ^ 
exchange,  duly  accepted,  will  be  found  elsewhere  in 
this  chapter.  The  Act  provides  that  the  acceptance 
must  be  in  writing  and  signed,  either  on  the  document 
itself  or  on  a  separate  piece  of  paper  attached  to  the 
document.  As  soon  as  the  drawee  accepts  the  bill, 
he  then  becomes  known,  not  as  the  drawee  but  as 
the  acceptor  and  he  is  the  party  primarily  liable  on  the 
bill,  that  is,  he  assumes  responsibility  for  its  payment. 
The  holder  has  a  right  to  demand  an  acceptance  for 
the  full  amount  of  the  bill  and  may  refuse  to  take  an 
acceptance  for  a  less  amount.  It  is  not  always  possible 
for  the  drawee  to  know  whether  he  has  sufficient  funds 


COMMERCIAL    LAW  393 

to  justify  an  acceptance,  and  so  the  Act  gives  him 
twenty-four  hours  within  which  to  make  up  his  mind. 
During  that  time  the  holder  is  obliged  to  wait  without 
taking  any  further  action.  Just  as  a  conditional  prom- 
ise to  pay  money  is  not  a  good  promissory  note,  just 
so  a  conditional  acceptance  is  not  looked  upon  as  an 
acceptance  which  a  party  is  obliged  to  take.  There 
are,  however,  occasionally  times  when  a  person  is  will- 
ing to  take  a  conditional  acceptance.  For  example,  I 
hold  a  bill  of  exchange  for  $1,000.  There  are  three  or 
four  indorsers  upon  it  and  I  take  it  to  the  drawee  to 
have  him  accept.  He  will  not  accept  for  more  than 
$500.  Now  I  feel  that  the  drawer  and  all  of  the  in- 
dorsers are  financially  irresponsible  and  I  would  rather 
have  the  acceptance  of  the  drawee  for  $500  than  noth- 
ing. I  am  willing  to  take  it.  The  question  comes  up 
as  to  the  effect  of  this  upon  the  other  parties,  the  draw- 
er and  the  indorsers.  The  Act  covers  that  fully  and 
it  is  important  that  it  be  kept  in  mind : 

Section  142.  "The  holder  may  refuse  to  take  a 
qualified  acceptance,  and  if  he  does  not  obtain  an  un- 
qualified acceptance,  he  may  treat  the  bill  as  dis- 
honored by  non-acceptance.  Where  a  qualified  ac- 
ceptance is  taken,  the  drawer  and  indorsers  are  dis- 
charged from  liability  on  the  bill,  unless  they  have  ex- 
pressly or  impliedly  authorized  the  holder  to  take  a 
qualified  acceptance,  or  subsequently  assent  thereto. 
When  the  drawer  or  indorser  receives  notice  of  a  quali- 
fied acceptance,  he  must,  within  a  reasonable  time, 
express  his  dissent  to  the  holder,  or  he  will  be  deemed 
to  have  assented  thereto." 


394  COMMERCIAL   LAW 

NEGOTIATION.— If  negotiable  paper  is  a  sub- 
stitute for  money,  it  follows  that  its  most  distinguish- 
ing characteristic  is  the  fact  that  it  may  be  transferred 
from  one  owner  to  another.  This  transfer  is  made  in 
one  of  two  ways.  It  may  be  by  operation  of  law,  or 
by  act  of  the  parties.  By  operation  of  law,  we  refer  to 
such  a  case  as  where  a  person  dies  and  his  commercial 
paper  then  becomes  the  property  of  his  administrator 
or  executor.  In  other  words,  the  law  transfers  the 
paper  to  the  deceased  persons's  legal  representative. 
The  other  case,  the  transfer  by  the  act  of  the  parties 
is,  of  course,  the  ordinary  case  and  the  one  we  shall 
consider  here.  The  sections  in  the  Negotiable  Instru- 
ments Act  which  discuss  this  matter  are  so  clear  that 
we  can  do  no  better  than  insert  them  in  full  at  this 
time: 

Section  30.  "An  instrument  is  negotiated  when 
it  is  transferred  from  one  person  to  another  in  such  a 
manner  as  to  constitute  the  transferee  the  holder 
thereof.  If  payable  to  bearer  it  is  negotiated  by  de- 
livery; if  payable  to  order  it  is  negotiated  by  the  in- 
dorsement of  the  holder  completed  by  delivery." 

Section  3 1 .  *'The  indorsement  must  be  written  on 
the  instrument  itself  or  upon  a  paper  attached  thereto. 
The  signature  of  the  indorser,  without  additional 
words,  is  a  sufficient  indorsement." 

Section  32.  "The  indorsement  must  be  an  in- 
dorsement of  the  entire  instrument.  An  indorsement 
which  purports  to  transfer  to  the  indorsee  a  part  only 
of  the  amount  payable,  or  which  purports  to  transfer 
the  instrument  to  two  or  more  indorsees  severally, 


COMMERCIAL    LAW  395 

does  not  operate  as  a  negotiation  of  the  instrument. 
But  where  the  instrument  has  been  paid  in  part,  it 
may  be  indorsed  as  to  the  residue." 

NEGOTIATION  BY  INDORSEMENT.— Ref- 
erence should  be  made  to  the  several  kinds  of  negotia- 
tion by  indorsement.  We  have  first  the  blank  indorse- 
ment. There  the  person  to  w^hom  the  document  is 
payable  simply  v^^rites  his  name  on  the  back  in  the 
same  way  as  it  appears  on  the  front.  That  is,  if  John 
Jones  is  the  payee,  he  writes  his  name  across  the  back 
of  the  instrument  "JOHN  JONES."  Next,  there  is 
the  special  indorsement.  John  Jones,  in  this  case,  is 
the  payee  and  wishes  to  transfer  the  note  to  John 
Wanamaker.  He  writes  across  the  back,  "pay  to  the 
order  of  John  Wanamaker"  and  signs  his  name, 
JOHN  JONES.  A  restrictive  indorsement  is  one 
where  the  further  negotiation  of  the  instrument  is 
limited  or  restricted  altogether.  For  example,  the 
payee  writes  across  the  back  "Pay  to  the  order  of 
John  Jones  only."  That  restricts  the  further  negotia- 
tion of  the  instrument.  Another  form  that  is  com- 
monly used  is  in  depositing  checks  in  the  bank  in  your 
own  account ;  usually  you  indorse  "for  collection"  and 
sign  your  name,  or  you  indorse  "for  deposit  only"  and 
sign  your  name.  This  form  of  indorsement  simply 
constitutes  the  bank  your  agent  to  make  collection, 
but  not  for  any  other  purpose  except  that  the  Act  now 
authorizes  a  bank  to  begin  suit  to  collect  on  a  docu- 
ment indorsed  in  that  way.  Another  form  of  indorse- 
ment, known  as  the  qualified  indorsement,  is  frequent- 
ly used  in  the  case  where  you  wish  to  indorse  without 


396  COMMERCIAL   LAW 

incurring  the  usual  liability  of  the  indorser.  This  is 
done  by  adding  under  your  name  the  expression  "with- 
out recourse."  This  does  not  mean,  as  is  commonly 
supposed,  that  you  are  free  from  all  liability  as  an  in- 
dorser.   We  shall  refer  to  this  later. 

THE  HOLDER  IN  DUE  COURSE.— As  we 
have  seen,  the  distinguishing  feature  of  the  law  of 
commercial  paper  is  negotiability  as  distinguished 
from  assignability.  The  principles  of  negotiability  are 
designed  very  largely  for  the  protection  of  the  person 
whom  we  call  the  holder  in  due  course.  It  is  essential 
then  to  bear  in  mind  the  condition  under  which  a  per- 
son becomes  such.  Section  52  of  the  Act  defines  a 
holder  in  due  course  as  follows : 

Section  52.  "A  holder  in  due  course  is  a  holder 
who  has  taken  the  instrument  under  the  following 
conditions:  (1)  That  the  instrument  is  complete  and 
regular  upon  its  face;  (2)  That  he  became  the  holder 
of  it  before  it  was  overdue,  and  without  notice  that  it 
had  been  previously  dishonored,  if  such  was  the  fact; 
(3)  That  he  took  it  in  good  faith  and  for  value;  (4) 
That  at  the  time  it  was  negotiated  to  him  he  had  no 
notice  of  any  infirmity  in  the  instrument  or  defect  in 
the  title  of  the  person  negotiating  it."  Section  57  de- 
fines what  the  rights  of  this  holder  in  due  course  are: 

Section  57.  "A  holder  in  due  course  holds  the  in- 
strument free  from  any  defect  of  title  of  prior  parties, 
and  free  from  defences  available  to  prior  parties 
among  themselves,  and  may  enforce  payment  of  the 
instrument  for  the  full  amount  thereof  against  all  par- 
ties liable  thereon." 


COMMERCIAL    LAW  397 

It  is  clear,  then,  that  by  this  section,  the  Act 
means  that  the  holder  in  due  course  takes  free  of  per- 
sonal defences,  although  he  does  not  take  free  of  ab- 
solute defences.  It  simply  remains  for  us  to  consider 
briefly  what  is  meant  by  a  personal  defence  and  what 
is  meant  by  an  absolute  defence.  We  have  already  il- 
lustrated this  in  one  of  our  cases  where  the  note  was 
a  present.  In  this  case,  there  was  no  consideration 
for  the  note.  The  boy  to  whom  it  was  given  could  not 
recover,  whereas  when  he  transferred  it  to  an  innocent 
third  party,  a  holder  for  value,  he  could  recover.  Thus 
we  say,  failure  of  consideration  is  a  personal  defence. 
Again,  some  person  steals  my  check  book,  fills  out  a 
check,  and  forges  my  name.  The  check  is  then  taken 
and  finally  gets  into  the  hands  of  a  person  who  is 
strictly  a  holder  in  due  course.  He  could  not  recover 
on  it,  however,  because  forgery  is  a  real  defence.  That 
is,  no  one  can  hold  me  liable  on  my  forged  check.  The 
ordinary  illustration  of  real  or  absolute  defences  are 
infancy,  lunacy,  illegality  and  sometimes  fraud.  Other  -^ 
defences  are  generally  personal  defences  and  do  not^^^ 
affect  the  holder  in  due  course.  To  put  it  another  way, 
a  real  defence  is  good  against  the  whole  world ;  a  per- 
sonal defence  is  available  only  against  such  as  are  notJ 
holders  in  due  course.  -^ 

LIABILITY  OF  PARTIES— The  parties  pri- 
marily  liable  on  negotiable  documents  are,  on  a  note, 
the  maker;  on  a  bill  of  exchange,  the  acceptor;  and 
on  a  check,  the  drawer.  The  liability  of  these  three 
parties  is  most  concisely  stated  in  Sections  60,  61,  62, 
as  follows : 


\ 


398  COMMERCIAL    LAW 

Section  60.  "The  maker  of  a  negotiable  instru- 
ment by  making  it  engages  that  he  will  pay  it  accord- 
ing to  its  tenor,  and  admits  the  existence  of  the  payee 
and  his  then  capacity  to  indorse." 

Section  61.  "The  drawer  by  drawing  the  in- 
strument admits  the  existence  of  the  payee,  and  his 
then  capacity  to  indorse;  and  engages  that  on  due 
presentment  the  instrument  will  be  accepted  or  paid, 
or  both,  according  to  its  tenor,  and  that  if  it  be  dis- 
honored and  the  necessary  proceedings  on  dishonor 
be  duly  taken,  he  will  pay  the  amount  thereof  to  the 
holder,  or  to  any  subsequent  indorser  who  may  be 
compelled  to  pay  it.  But  the  drawer  may  insert  in  the 
instrument  an  express  stipulation  negativing  or  limit- 
ing his  own  liability  to  the  holder.*' 

Section  62.  "The  acceptor  by  accepting  the  in- 
strument engages  that  he  will  pay  it  according  to  the 
tenor  of  his  acceptance;  and  admits:  (1)  The  existence 
of  the  drawer,  the  genuineness  of  his  signature,  and 
his  capacity  and  authority  to  draw  the  instrument; 
and,  (2)  The  existence  of  the  payee  and  his  then  ca- 
pacity to  indorse." 

INDORSERS'  LIABILITY.— We  have  not  yet 
considered  the  question  of  the  liability  of  persons  who 
transfer  negotiable  documents.  Indorsements  may 
be  made,  as  we  have  said,  in  two  ways :  either  by  in- 
dorsing the  document,  or  if  it  is  payable  to  bearer,  by 
delivering  it  without  indorsement.  The  liability  of 
these  two  parties  is  stated  in  the  Negotiable  Instru- 
ments Act  in  Sections  65  and  66  in  the  following 
language: 


COMMERCIAL    LAW  399 

Section  65.  "Every  person  negotiating  an  instru- 
ment by  delivery  or  by  a  qualified  indorsement,  v^^ar- 
rants:  (1)  That  the  instrument  is  genuine  and  in  all 
respects  what  it  purports  to  be;  (2)  That  he  has  a 
good  title  to  it;  (3)  That  all  prior  parties  had  capacity 
to  contract;  (4)  That  he  has  no  knowledge  of  any  fact 
which  would  impair  the  validity  of  the  instrument  or 
render  it  valueless.  But  when  the  negotiation  is  by 
delivery  only,  the  warranty  extends  in  favor  of  no 
holder  other  than  the  immediate  transferee.  The  pro- 
visions of  subdivision  three  of  this  section  do  not  ap- 
ply to  persons  negotiating  public  or  corporation  se- 
curities other  than  bills  and  notes." 

Section  66.  "Every  indorser  who  indorses  with- 
out qualification,  warrants  to  all  subsequent  holders 
in  due  course:  (1)  The  matters  and  things  mentioned 
in  subdivision  one,  two  and  three  of  the  next  preced- 
ing section;  and  (2)  That  the  instrument  is  at  the 
time  of  his  indorsement  valid  and  subsisting.  And, 
in  addition,  he  engages  that  on  due  presentment,  it 
shall  be  accepted  or  paid,  or  both,  as  the  case  may  be, 
according  to  its  tenor,  and  that  if  it  be  dishonored,  and 
the  necessary  proceedings  on  dishonor  be  duly  taken, 
he  will  pay  the  amount  thereof  to  the  holder,  or  to  any 
subsequent  indorser  who  may  be  compelled  to  pay  it." 

QUALIFIED  INDORSEMENT.  —  Section  65 
speaks  of  delivery  by  qualified  instrument.  You  will 
remember  that  we  have  already  mentioned  the  in- 
dorsement in  the  form  "without  recourse."  This  is  a 
qualified  indorsement.  The  kind  of  liability  a  person 
incurs  who  indorses  in  that  way  is  set  forth  in  Sec- 


400  COMMERCIAL    LAW 

tion  65.  This  is  important  because  the  layman  as- 
sumes that  in  indorsing  "without  recourse"  one  means 
to  incur  no  liability  as  indorser.  Such  is  not  the  case. 
Reread  section  65,  which  covers  the  indorsement 
without  recourse.  There  is  liability  for  the  things 
mentioned  therein.  Then  in  section  66,  the  last  para- 
graph, you  will  notice  that  every  indorser,  who  in- 
dorses without  qualification  "engages  that  on  due 
presentment,  it  shall  be  accepted  or  paid,  or  both,  as 
the  case  may  be,  according  to  its  tenor,  and  that  if  it  be 
dishonored,  and  the  necessary  proceedings  on  dis- 
honor be  duly  taken,  he  will  pay  the  amount  thereof 
to  the  holder."  This  does  not  mean  that  the  indorser 
will  always  pay,  but  only  if  the  necessary  steps  are 
taken.  We  shall  consider  what  these  necessary  steps 
are  when  we  take  up  the  subject  of  "protest." 

CHECKS. — A  check  is  simply  a  bill  of  exchange 
drawn  on  a  bank  and  payable  on  demand.  Therefore, 
the  general  principles  which  we  have  been  laying 
down,  in  regard  to  bills  of  exchange  and  other  nego- 
tiable paper,  apply  to  checks,  although,  of  course,  the 
check  is  a  more  recent  development  in  the  law  of 
commercial  paper  than  the  other  two  forms,  namely, 
the  promissory  note  and  the  bill  of  exchange.  Section 
186  of  the  Act  reads:  "A  check  must  be  presented  for 
payment  within  a  reasonable  time  after  its  issue  or 
the  drawer  will  be  discharged  from  liability  thereon 
to  the  extent  of  the  loss  caused  by  the  delay." 

HOLDER  OF  CHECK.— It  is  important  to  re- 
member that  the  holder  of  a  check  has  no  right  against 
the  bank.    Thus,  if  I  hold  John  Rockefeller's  check, 


COMMERCIAL    LAW  401 

drawn  on  the  Institute  National  Bank,  and  I  present 
it  to  the  bank  and  the  bank  refuses  to  pay  it  for  no 
reason  at  all,  or  for  a  purely  arbitrary  reason,  I  can- 
not sue  the  bank.  The  only  thing  I  can  do  is  to  seek 
to  get  the  money  on  the  check  from  Mr.  Rockefeller 
personally.  This  is  because  the  drawing  of  a  check  is 
not  the  assignment  of  so  much  money  to  the  payee 
named  in  the  check.  Of  course,  Mr.  Rockefeller 
might  sue  his  bank  for  failure  to  honor  his  check  if 
it  refuses  to  pay  it  to  me  for  no  valid  reason.  One  fur- 
ther fact  is  important.  When  a  holder  of  a  check 
procures  it  to  be  certified  by  the  bank,  that  releases  all 
indorsers  and  also  the  drawer.  And  so,  if  I  have  a 
check  drawn  by  Mr.  Rockefeller  and  indorsed  by  six 
millionaires  and  I  take  that  to  the  bank  and  have  them 
certify  it  and  then  the  bank  fails,  I  have  lost  every- 
thing if  the  bank  never  pays  anything  to  a  depositor. 
By  getting  it  certified  I  release  Mr.  Rockefeller  and 
all  of  the  indorsers. 

THE  MEANING  OF  PROTEST.— Protest  is 
often  used  broadly  to  signify  any  dishonor  of  a  nego- 
tiable instrument,  but,  of  course,  properly  it  means 
presentment  by  a  notary,  and  his  certification  that  an 
instrument  has  been  presented  for  payment  and  has 
been  dishonored.  Protest  is  only  necessary  in  regard 
to  foreign  bills.  A  foreign  bill  is  one  which  is  drawn 
in  one  State  and  payable  in  another.  For  this  purpose 
the  different  States  of  the  Union  are  foreign  to  each 
other.  A  bill  drawn  in  New  York  payable  in  Boston 
is  as  much  a  foreign  bill  for  this  purpose  as  one  drawn 
in  England  payable  here. 


402  COMMERCIAL    LAW 

WHAT  MAY  BE  PROTESTED.— Though  pro- 
test is  not  necessary  for  any  other  negotiable  instru- 
ment except  foreign  bills  of  exchange,  including  for- 
eign checks,  it  is  convenient  frequently  to  protest 
other  negotiable  instruments.  The  law  provides  that 
protest  may  be  made  of  other  negotiable  instruments, 
and  the  certificate  of  protest  is  evidence  in  such  cases, 
as  well  as  in  the  case  of  foreign  bills  of  exchange,  of 
the  facts  which  it  states,  namely,  that  the  instrument 
has  been  duly  presented  and  notice  given.  Statements 
in  a  certificate  of  protest,  however,  whether  of  foreign 
bills  or  of  other  instruments,  are  not  conclusive  evi- 
dence of  the  facts  which  they  state.  They  are  some 
evidence,  but  it  may  be  shown  by  other  evidence  that 
the  instrument  was  not  presented,  or  was  not  pre- 
sented at  the  time  the  certificate  asserts,  or  that  the 
notice  was  not  given  as  therein  asserted. 

SUGGESTIONS  FOR  DRAWING  NEGOTIA- 
BLE PAPER. — Very  few  suggestions  are  necessary 
in  drawing  checks.  We  almost  always  use  the  printed 
form.  The  only  thing  to  be  careful  about  is  to  draw 
lines  through  the  blank  spaces  so  that  a  check  written 
for  $70  may  not  have  something  else  written  be- 
fore the  word  seventy,  thereby  raising  the  amount 
to,  say,  One  thousand  seventy,  and  the  figures, 
because  they  are  not  near  the  dollar  sign,  corre- 
spondingly raised.  The  promissory  note  is  frequently 
drawn  by  the  parties  without  any  printed  form.  In 
order  to  be  negotiable,  the  note  must  bear  the  words 
"or  order,"  or  "bearer";  otherwise,  it  would  not  be 
negotiable,  and  would  pass  by  the  law  of  assignability 


COMMERCIAL    LAW  403 

without  any  of  the  advantages  accruing  to  negotiable 
paper.  The  draft,  or  bill  of  exchange,  is  the  docu- 
ment which  the  average  layman  is  the  least  familiar 
with,  and  before  drawing  one,  a  printed  form  should 
be  secured  or  a  book  on  negotiable  paper  be  consulted. 
NEGOTIABILITY.— Care  should  be  taken  in 
the  indorsement  of  any  negotiable  paper.  The  in- 
dorsement in  blank,  that  is,  simply  writing  your  name 
upon  the  paper  on  the  back,  is  the  one  commonly 
used,  but  is  a  dangerous  one  to  use,  if  there  is  any 
possibility  of  the  paper  being  lost  or  stolen.  For  ex- 
ample, A  has  a  promissory  note  payable  to  his  order, 
and  he  simply  writes  his  name  across  the  back  and 
mails  it  to  a  person  who  has  agreed  to  accept  it  in 
payment  of  a  bill  A  owes  him.  The  letter  is  lost,  gets 
into  the  hands  of  X,  who  opens  it  and  takes  the  note. 
Of  course,  the  note  is  no  good  to  X.  X,  however, 
takes  the  note  to  someone  and  persuades  that  person 
to  discount  the  note  for  him.  That  person  does  it  in 
good  faith,  believing  X  came  by  the  note  rightfully. 
The  discounter  is  therefore  a  holder  in  due  course,  and 
he  would  be  able  to  collect  on  the  note.  What  A 
should  have  done,  when  he  sent  the  note  to  his  friend 
John  Brown,  was  to  have  indorsed  it  specially,  "Pay 
to  the  order  of  John  Brown,  A."  Again,  a  person  who 
is  collecting  some  money  for  his  friend  receives  a 
check  payable  to  his  order.  He  wants  to  turn  the 
check  over  to  his  friend,  and  indorses  it  by  a  special 
indorsement.  "When  the  friend  tries  to  collect  on  the 
check,  it  is  returned  "no  funds."  The  friend  now  may 
hold  the  person  responsible  who  indorsed  the  check, 


404  COMMERCIAL    LAW 

because  an  indorser  guarantees  the  payment  of  the 
instrument  if  the  proper  steps  be  taken  to  fix  his  li- 
ability. Ordinarily,  of  course,  we  wish  an  indorser  to 
assume  this  liability,  but  in  this  particular  case  there 
was  no  reason  why  this  man  should  have  indorsed  the 
check  in  that  way.  He  could  have  indorsed  it,  and 
added  to  his  signature  the  words  "without  recourse," 
which  would  have  relieved  him  from  paying  the  in- 
strument if  the  drawer  did  not  pay  it. 


CHAPTER  XIII 


Torts  and  Crimes 

TORT,  CONTRACT,  AND  CRIME  DISTIN- 
GUISHED.— We  have  already  discussed  con- 
tracts in  detail.  The  fundamental  idea  of  con- 
tracts is  that  the  obligation  of  a  contract  is  voluntarily 
assumed.  Although  it  might  be  difficult,  at  least 
theoretically,  I  may  take  the  position  that  I  will  not 
enter  into  any  contractual  relationship  with  anyone 
for  a  month.  I  could  do  this  legally,  if  I  were  willing 
to  put  up  with  the  annoyance  which  I  would  probably 
suffer.  But  suppose  I  take  the  position  that  I  will  as- 
sault Jones  and  I  will  not  pay  him  any  damages  for 
the  injuries  occasioned  by  my  assault.  My  position 
would  be  wholly  untenable.  The  contract  obligation 
is  voluntarily  assumed.  The  law  imposes  the  obliga- 
tions or  duties  which  exist  in  torts,  and  I  must  ob- 
serve those  duties  whether  I  wish  to  or  not.  Similarly, 
one  must  observe  all  of  the  criminal  law  of  the  jurisdic- 
tion where  he  is,  whether  he  will  or  not.  In  fact,  ig- 
norance of  the  law  is  no  excuse.  A  man  may  even 
commit  a  crime,  although  he  did  not  know  there  was  a 
law  prohibiting  the  act.  Again,  in  the  definition  of  a 
tort,  we  shall  find  the  expression,  "breach  of  duty  im- 
posed by  lav/."  A  man  arrives  home  late  at  night.  He 
finds  a  person  suffering  from  exposure  at  his  front 
door.  The  person  asks  to  be  taken  in  and  lodged  for 
the  night,  but  the  householder  refuses  to  take  him  in, 
and  the  man  contracts  pneumonia  from  exposure.    In 

405 


406  COMMERCIAL    LAW 

this  case  the  householder  is  not  liable.  There  is  no 
duty  imposed  by  law  to  be  your  brother's  keeper. 
There  may  be  a  moral  obligation  in  the  case  just  cited, 
but  not  a  legal  one. 

JURISDICTION. —  There  is  another  way  in 
which  a  criminal  action  is  sometimes  different  from  an 
action  in  contract  or  an  action  in  tort.  A  suit  on  a 
contract  may  be  brought  in  any  court  where  jurisdic- 
tion over  the  parties  may  be  secured.  For  example, 
A  and  B  make  a  contract  in  New  York.  The  contract 
is  broken,  and  six  months  later,  A  and  B  are  both  in 
Galveston,  Texas.  Either  party  could  sue  the  other 
in  the  Texas  court  on  the  broken  contract.  The  same 
is  true  in  regard  to  most  tort  actions.  A  slanders  B 
in  New  York.  A  little  later  both  are  in  San  Fran- 
cisco, California.  B  could  sue  A  in  a  California  court 
for  slander.  A  criminal  prosecution,  however,  must 
always  be  brought  in  the  State  where  the  crime  is 
committed,  and  generally  in  that  very  county  of  the 
State.  Hence,  if  A  murders  B  in  Kings  County,  New 
York,  the  trial  could  not,  under  any  circumstances,  be 
held  in  Essex  County,  New  Jersey,  for  no  New  Jersey 
court  would  have  jurisdiction  over  an  offense  com- 
mitted in  New  York,  because  the  wrong  is  done  to  the 
people  of  the  State  of  New  York,  and  not  to  the  people 
of  the  State  of  New  Jersey. 

TORT  DEFINED.— It  has  been  stated  by  the 
Court  of  Appeals  of  New  York  that  no  satisfactory 
definition  of  a  tort  can  be  found.  It  is  easier,  perhaps, 
to  explain  to  the  layman  the  meaning  of  the  term 
"tort"  by  simply  enumerating  such  things  as  are  torts. 


COMMERCIAL    LAW  407 

For  example,  assault  and  battery  is  a  tort,  and  so  are 
libel,  slander,  false  imprisonment,  malicious  prosecu- 
tion, fraud,  deceit,  and  negligence.  Bigelow*s  defini- 
tion is  perhaps  least  objectionable  of  all  of  the  defini- 
tions. He  defines  a  tort  as  a  breach  of  duty  imposed 
by  municipal  law,  for  which  a  suit  of  damages  will  lie. 
Every  tort  involves  the  violation  of  a  duty  owed  to  the 
individual.  For  example,  A  owes  to  B  the  duty  not 
to  attempt  with  force  to  harm  his  person,  or  to  hit 
him,  or  to  touch  him  intentionally,  or  recklessly.  The 
violation  of  this  duty  to  B,  by  A,  constitutes  the  tort 
of  assault  and  battery.  Again,  A  owes  to  B  the  duty 
not  to  injure  B's  reputation,  either  by  spoken  word  or 
by  written  word,  so  long  as  B  has  done  nothing  to  for- 
feit this  right  to  a  good  reputation.  The  violation  of 
this  duty,  on  the  part  of  A,  constitutes  the  tort  of  libel 
or  slander.  So,  then,  it  is  easy  to  see  why  libel,  for 
example,  is  a  tort.  It  is  a  breach  of  duty  which  the  law 
imposes  upon  A  for  which  B  may  sue  and  recover 
damages  if  he  is  injured.  The  same  with  assault  and 
battery,  and  the  various  other  torts. 

CRIME  DEFINED.— A  tort,  as  we  have  indi- 
cated, is  a  breach  of  duty  owed  by  A  to  B.  A  crime  is 
also  a  breach  of  duty,  but  in  this  case,  A  is  an  individ- 
ual citizen,  and  B  is  a  sovereign  State.  C  murders  D. 
When  C  is  prosecuted,  the  action  will  read,  "The  peo- 
ple of  the  State  of  New  York  against  C."  In  other 
words,  the  crime  is  a  wrong  to  the  State,  and  so  a 
crime  has  been  defined  as  an  act  or  omission  which  is 
forbidden  by  law,  to  which  a  punishment  is  annexed, 
and  which  a  State  prosecutes  in  its  own  name.    Mur- 


408  COMMERCIAL   LAW 

der,  manslaughter,  arson  and  forgery  are  all  crimes. 
We  may  correctly  also  add  assault  and  battery,  thus 
suggesting  the  fact  that  the  same  act  may  be  both  a 
crime  and  a  tort,  because  the  assault  is  a  wrong 
against  the  individual  and  against  the  State.  The  in- 
dividual will  sue  in  a  civil  court,  to  recover  pecuniary 
damages,  in  an  ordinary  suit  of  tort,  while  the  State, 
for  the  same  offense,  through  the  district  attorney's  or 
prosecutor's  office,  will  criminally  proceed  against  the 
guilty  party.  We  shall  now  consider  briefly  some  of 
the  more  important  torts  and  crimes. 

ASSAULT  AND  BATTERY.— Assault  is  an  at- 
tempt,  real  or  apparent,  to  do  injury  to  the  person  of 
another.  Battery  is  a  completed  assault.  It  is  not 
necessary  that  a  person  have  the  actual  ability  to 
carry  out  the  threat  to  constitute  an  assault.  For  ex- 
ample, to  point  an  unloaded  revolver  at  a  person  is  an 
assault.  While  the  definition  might  convey  the  im- 
pression that  force  was  necessary,  this  is  not  strictly 
true,  because  deception  sometimes  may  be  the  equiva- 
lent of  force.  For  example:  Assault  and  battery  is 
committed  where  a  person  administers  a  drug  to  some- 
one under  the  belief  that  he  is  taking  an  entirely  dif- 
ferent kind  of  drug.  Certain  assaults,  although  tech- 
nically such,  are  excusable  or  justifiable.  Formerly  a 
school  teacher  had  the  right  of  corporal  punishment 
without  being  liable  for  assault  and  battery.  By 
statute  this  right  is  generally  taken  away  now.  A 
parent,  however,  may  inflict  corporal  punishment  on 
his  child  without  any  civil  liability.  Courts  generally 
assign  as  the  reason  for  this,  the  fact  that  it  would  not 


COMMERCIAL   LAW  409 

be  conducive  to  the  welfare  of  the  family  to  have  chil- 
dren sue  their  parents,  and  the  further  fact  that  the 
child's  rights  are  protected  by  giving  him  the  right  to 
have  his  parent  arrested  and  punished  criminally  for 
an  assault.  While  it  was  held  formerly  that  a  husband 
had  the  right  to  beat  his  wife,  no  modern  court  has  up- 
held this  view. 

SELF-DEFENSE.— Another  case  where  assault 
is  justified  is  in  the  case  of  self-defense.  It  is  common 
saying  that  a  man's  house  is  his  castle,  and  the  right 
of  self-defense  is  founded  on  the  right  of  self-preserva- 
tion. So  that  it  follows  that  a  man  may  use  force  in 
protecting  both  himself  and  his  property.  A  greater 
amount  of  force  is  ordinarily  permitted  in  the  protec- 
tion of  the  person  than  of  property.  In  using  force, 
however,  such  force  only  as  is  reasonably  necessary 
may  be  used.  For  example,  a  man  attempts  to  take 
my  watch  from  my  pocket.  I  strike  his  arm  to  pre- 
vent it,  and  do  so  successfully.  Thereafter,  as  soon 
as  the  man's  back  is  turned,  I  jump  on  him  and  assault 
him,  injuring  him  severely.  I  would  be  liable  in  this 
case  because  more  force  than  is  necessary  for  the  pro- 
tection of  my  property  was  used. 

LIBEL  AND  SLANDER.— These  two  terms  are 
frequently  combined  under  the  one  term  of  defama- 
tion which  is  defined  as  a  false  imputation  upon  one's 
character  or  reputation.  Slander  is  oral  defamation, 
and  libel  is  written  defamation.  The  action  of  slander 
is  very  technical.  Perhaps  there  is  no  better  summary 
than  that  given  by  the  United  States  Supreme  Court 
in  the  case  of  Pollard  v.  Lyon,  91  U.  S.  225,  as  to 


410  COMMERCIAL    LAW 

what  statements  are  slanderous  per  se.  "Slander," 
the  court  says,  "may  be  divided  into  five  classes,  as  fol- 
lows: (1)  Words  falsely  spoken  of  a  person  which  im- 
pute to  the  party  the  commission  of  some  criminal  of- 
fense involving  moral  turpitude,  for  which  the  party,  if 
the  charge  is  true,  may  be  indicted  and  punished. 
(2)  Words  falsely  spoken  of  a  person  which  impute 
that  the  party  is  infected  with  some  contagious  dis- 
ease, where,  if  the  charge  is  true,  it  would  exclude  the 
party  from  society ;  or  (3)  Defamatory  words  falsely 
spoken  of  a  person,  which  impute  to  the  party  unfit- 
ness to  perform  the  duties  of  an  office  or  employment 
of  profit,  or  the  want  of  integrity  in  the  discharge  of 
the  duties  of  such  an  office  or  employment.  (4)  De- 
famatory words  falsely  spoken  of  a  party  which  preju- 
dice such  party  in  his  or  her  profession  or  trade. 
(5)  Defamatory  words  falsely  spoken  of  a  person, 
which,  though  not  in  themselves  actionable,  occasion 
the  party  special  damage."  A  libel  is  any  writing,  pic- 
ture, print  or  effigy  which  tends  to  hold  one  up  to  the 
contempt,  scorn,  ridicule,  or  disgrace  of  his  fellow 
men.  We  see  then,  that  many  statements  which  would 
not  be  slanderous  would  be  libelous. 

PRINCIPLES  COMMON  TO  BOTH  LIBEL 
AND  SLANDER. — Certain  principles  are  common 
to  both  libel  and  slander.  There  must  be  a  publica- 
tion in  either  case.  To  say  to  a  school  teacher,  in  a 
room  where  he  and  the  speaker  are  the  only  persons 
present,  that  he  is  a  fool,  would  not  be  slanderous. 
There  is  no  publication.  To  write  a  letter  to  a  minis- 
ter calling  him  a  thief  and  a  crook  would  not  be  libel- 


COMMERCIAL    LAW  411 

ous  because  there  would  be  no  publication.  After  he 
had  opened  the  letter  and  read  it,  should  he  show  it 
to  any  of  his  friends,  he  would  have  made  the  publica- 
tion, and  impliedly  have  consented  to  its  publication. 
Whether  to  send  statements  like  this  on  a  postal  card 
constitutes  a  publication  or  a  libel  is  an  open  question, 
as  also  is  the  question  whether  the  dictation  of  false 
statements  to  a  person's  stenographer  constitutes  pub- 
lication to  some  third  person. 

PRIVILEGE.  —  Certain  clearly  slanderous  or 
libelous  statements  may,  nevertheless,  not  be  action- 
able, because  they  are  absolutely  or  qualifiedly  privi- 
leged. Such  is  the  case  of  any  speech  made  by  a  mem- 
ber of  Congress,  or  a  member  of  the  State  Legislature 
on  the  fioor  of  the  legislative  hall.  Such  statement, 
however,  made  from  the  stump  during  a  political  cam- 
paign, would  not  be  privileged.  The  first  is  what  we  call 
an  absolute  privilege.  There  is  a  certain  class  of  privi- 
lege which  we  speak  of  as  qualified  privilege.  News- 
papers, for  example,  are  permitted  to  comment  by  way 
of  criticism  on  any  matters  of  current  interest,  pro- 
vided a  reasonable  limit  is  not  exceeded.  It  would  not 
be  permissible  for  a  newspaper  to  pick  out  John  Jones, 
a  wholly  retiring  and  inconspicuous  citizen  of  a  town, 
and  make  statements  about  him  which  hold  him  up  to 
ridicule,  because  the  public  welfare  does  not  call  for 
such  action.  However,  were  John  Jones  running  for 
public  office,  it  v^^ould  be  proper  for  a  newspaper  to 
make  comment  upon  his  record,  and  such  statements 
would  have  a  qualified  privilege,  although  subjecting 
him  to  ridicule.    A  member  of  the  legislature  on  the 


412  COMMERCIAL    LAW 

floor  of  the  legislature  could  make  statements  con- 
cerning the  same  John  Jones  and  never  be  liable  be- 
cause of  his  absolute  privilege.  We  must  assume, 
that,  with  each  case  mentioned,  the  statement  made  is 
false,  in  order  to  have  it  constitute  libel  or  slander.  In 
other  words,  truth  is  a  defense  to  an  action  for  def- 
amation. A  person -has  no  right  to  a  false  character, 
and  to  speak  the  truth  about  him  does  not,  therefore, 
constitute  a  tort. 

FRAUD  OR  DECEIT.— In  order  to  establish 
the  tort  of  fraud,  it  is  necessary  to  prove  the  following 
five  allegations:  (1)  that  A  makes  a  false  statement  of 
a  material  fact;  (2)  with  knowledge  of  its  falsity;  (3) 
with  the  intent  that  it  should  be  acted  upon ;  (4)  that 
the  other  party  believed  it  to  be  true;  and,  (5)  acted 
upon  it  to  his  damage.  The  absence  of  any  one  of 
these  five  elements  will  prevent  the  action  of  fraud 
from  existing.  The  action  of  fraud  is  most  important 
not  only  in  torts,  but  also  it  plays  a  large  part  in  the 
law  of  contracts,  and  the  law  of  sales,  as  to  both  real 
property  and  personal  property.  A  stock  broker  says 
to  Mr.  Jones:  "My  house  is  offering  the  best  bargain 
in  oil  stocks  which  has  been  on  the  market  for  five 
years.  Aetna  Oil  Mining  Stock  at  $5  a  share  is  the 
best  buy  on  the  curb  to-day.  There  is  no  doubt  the 
company  will  pay  10%  in  dividends  in  the  first  year." 
Green,  relying  on  this  representation,  purchases  100 
shares  of  the  stock.  The  stock,  thereafter,  steadily 
declines,  and  never  pays  a  dividend.  Has  he  cause  of 
action  for  fraud?  Clearly  not,  because  there  has  been 
no  false  statement  of  material  fact.    These  statements 


COMMERCIAL    LAW  413 

about  the  future  earning  capacity  are  seller's  talk,  or 
the  salesman  is  merely  puffing  his  wares.  Both  these 
expressions  are  common  in  the  reports  and  for  a  mere 
statement  of  opinion,  no  action  of  fraud  lies.  It  must 
be  a  statement  of  fact.  Supposing  the  same  broker 
had  said  to  his  customer,  "Aetna  Oil  Company  has 
paid  10%  dividends  for  the  last  ten  years,"  and  such 
statement  afterwards  was  found  by  the  purchaser  to 
have  been  false.  An  action  of  fraud  would  lie,  because 
the  dividend  record  of  a  company  is  in  the  past,  and  it 
is  not  opinion,  but  fact.  Again,  suppose  the  state- 
ments to  have  been  the  same  as  in  the  second  illustra- 
tion, and  that  they  were  altogether  false,  but  within 
three  months,  through  a  sudden  change  in  conditions, 
the  affairs  of  the  company  were  greatly  improved,  the 
stock  went  up  in  value,  and  began  to  pay  large  divi- 
dends. Again,  there  would  be  no  cause  of  action,  be- 
cause the  fifth  element,  that  of  damage,  would  be  lack- 
ing. Again,  suppose  the  purchaser,  after  learning 
from  the  broker  about  the  past  dividend  record,  should 
say,  "I  will  give  you  my  answer  to-morrow."  Mean- 
while, he  looks  up  in  a  financial  paper  the  dividend 
record  and  discovers  the  statements  to  be  false.  He 
then  purchases  the  stock.  Here  he  would  have  no 
cause  of  action,  although  he  might  be  damaged,  for 
the  reason  that  by  making  his  own  investigation,  he 
has  clearly  shown  that  he  has  not  relied  on  the  state- 
ment made  by  the  broker,  and  the  fourth  element  of 
the  action  of  fraud  is  missing.  In  all  of  these  situa- 
tions, the  court  assumes  that  it  is  dealing  with  a  per- 
son  of  ordinary  intelligence,  and  it  does  not  require 


414  COMMERCIAL    LAW 

the  very  highest  degree  of  caution  on  the  part  of  the 
person  claiming  to  be  defrauded,  nor  will  it  aid  the  de- 
frauded person  if  he  does  not  exercise  an  ordinary  de- 
gree of  care  in  safeguarding  his  rights  and  forming  his 
judgment  in  the  particular  transaction.  In  laying 
down  this  rule,  the  court  does  not  require  that  a  person 
must  make  his  own  private  investigation  ordinarily, 
but  he  may  rely  upon  the  statement  made  to  him.  For 
example,  in  a  Massachusetts  case,  a  real  estate  broker, 
in  selling  a  piece  of  property  to  a  purchaser  in  a  subur- 
ban town  adjoining  Boston,  told  him  that  forty  trains 
per  day  stopped  there.  The  statement  was  false,  the 
purchaser  could  have  easily  inquired  at  the  railroad 
ticket  office,  which  was  only  a  short  distance  from  the 
real  estate  agent's  office,  but  he  did  not  do  so.  It  was 
held  that  he  could  recover  in  an  action  of  fraud.  Were 
it  not  so,  the  courts  would,  in  practice,  be  laying  down 
the  rule  that  one  must  assume  everyone  a  liar.  On  the 
other  hand,  had  this  same  purchaser  been  defrauded 
by  the  same  real  estate  dealer  a  half-dozen  times  be- 
fore, then  he  would  not  be  acting  as  a  reasonably  care- 
ful man  in  relying  on  a  statement  of  this  kind.  Under 
these  circumstances,  the  ordinary  prudent  man  would 
make  his  own  investigation. 

FALSE  IMPRISONMENT.— A  person  un- 
der ordinary  conditions,  enjoys  the  full  right  of  free- 
dom of  locomotion.  The  invasion  of  that  right  we  call 
false  imprisonment.  It  is  immaterial  how  trivial  the 
imprisonment  may  be,  for  merely  locking  a  person  in 
a  room  for  five  minutes  as  a  joke  would  be  enough  to 
give  rise  to  cause  for  action.    The  amount  of  damages 


COMMERCIAL    LAW  415 

which  the  jury  might  allow  under  the  circumstances 
would,  of  course,  be  another  matter.  Many  of  the 
principles  mentioned  in  assault  and  battery  are  ap- 
plicable in  this  tort.  Certain  persons  have  a  right  to 
imprison  other  people,  and  it  is  not  false  imprison- 
ment. The  sheriff  of  the  county,  with  a  warrant  for 
my  arrest,  may  imprison  me,  and,  of  course,  I  have  no 
action  for  false  imprisonment.  He  is  acting  under 
regular  process  from  the  court.  A  man  commits  a  se- 
rious crime  in  my  presence.  I  lock  him  in  a  room 
until  I  can  call  an  officer.  This  is  not  false  imprison- 
ment. The  right  of  a  private  citizen  to  make  an  arrest 
and  not  be  liable  for  false  imprisonment  is  stated  as 
follows  in  Section  183,  of  the  New  York  Code  of  Crim- 
inal Procedure : 

A  private  person  may  arrest  another:  (1)  For  a 
crime,  committed  or  attempted  in  his  presence;  (2) 
When  the  person  arrested  has  committed  a  felony, 
although  not  in  his  presence. 

This  is  typical  of  the  rule  as  it  exists,  with  slight 
modifications,  in  most  of  the  States.  While  mere 
words  alone  will  not  constitute  an  assault,  it  has  been 
held  that  mere  words  will  constitute  false  imprison- 
ment. While  a  person  may  be  justified  in  arresting 
someone  else,  yet,  for  the  abuse  of  that  privilege,  the 
same  as  using  greater  force  in  self-defense  than  is  nec- 
essary, the  action  of  false  imprisonment  will  lie.  The 
man  whom  I  arrest  for  committing  a  very  serious 
crime  in  my  presence,  I  lock  in  my  house  and  keep 
there  a  month,  feeding  him  on  bread  and  water.  I  am 
guilty  of  false  imprisonment  because  while  I  had  a 


416  COMMERCIAL    LAW 

right  to  arrest  him,  it  was  my  duty  to  turn  him  over 
to  the  proper  authorities  just  as  soon  as  possible.  In 
a  case,  such  as  this,  a  month  is,  of  course,  an  unrea- 
sonable time. 

NEGLIGENCE.— To  say  that  negligence  is  fail- 
ure to  use  due  care  is  a  poor  attempt  at  definition,  but 
it  is  practically  all  that  can  be  said.  The  common  law- 
maxim,  "sic  utere  tuo  ut  alium  non  laedas"  (so  use 
your  own  as  not  to  injure  another),  is  at  this  basis 
of  the  law  of  negligence.  At  the  outset,  we  must  be 
careful  to  distinguish  between  "accident"  and  "negli- 
gence." I  am  walking  on  a  street  and  slip  on  a  banana 
skin,  and  in  falling,  knock  down  a  passing  pedestrian. 
This  is  an  accident.  With  my  office  window  overlook- 
ing the  street,  in  a  banana-eating  contest,  I  eat  fifteen 
bananas,  and  throw  the  skins  out  of  the  window  on 
the  sidewalk.  The  street  is  not  well  lighted.  A 
passerby  falls  and  is  injured.  This  is  negligence,  and 
I  would  be  liable. 

CONTRIBUTORY  NEGLIGENCE.  —  Negli- 
gence must  be  proved  in  order  to  entitle  the  injured 
party  to  recover.  The  court  will  not  presume  negli- 
gence merely  because  an  injury  takes  place.  Again, 
I  repeatedly  warn  a  motorman  and  conductor  on  a 
trolley  car  that  I  wish  to  get  off  at  a  certain  station. 
Both  parties  forget  the  request,  and  the  car  goes  by 
the  station  at  the  rate  of  fifteen  miles  an  hour.  I 
think  I  can  get  off  safely,  and  attempt  to  do  so.  In 
doing  so,  I  slip  and  break  a  leg.  Although  the  two 
employees  of  the  trolley  company  were  negligent,  for 
not  attending  to  their  business,  I  am  guilty  of  con- 


COMMERCIAL   LAW  417 

tributory  negligence  in  trying  to  get  off  a  rapidly 
moving  car,  and  cannot  recover.  Contributory  negli- 
gence is  a  bar  to  recovery. 

STANDARD  OF  CARE.— The  standards  of  care 
to  be  applied  in  negligence  vary  from  time  to  time. 
What  vi^ould  have  been  due  care  on  the  part  of  a  rail- 
road company  fifty  years  ago,  would  probably,  in  few 
cases,  be  held  to  be  due  care  to-day.  This  is  so,  be- 
cause of  the  improvements  which  have  been  made  in 
mechanical  devices  in  the  past  fifty  years.  Again,  in 
order  to  make  a  cause  of  action  for  negligence,  there 
must  be  some  causal  relation  between  the  negligent 
act  and  the  injury.  Granting  that  the  man  who 
slipped  on  the  banana  skin,  which  I  threw  from  my 
office  window,  had  sued  me  for  damages  because  of 
his  broken  leg,  it  would  not  follow  that  I  would  be 
liable  to  the  same  man  five  years  later,  for  the  reason 
that  an  insurance  company  denied  him  a  policy  be- 
cause of  stiffness  in  the  same  broken  leg,  caused  by 
the  fall  on  the  banana  skin.  The  law  looks  not  at  the 
remote,  but  at  the  proximate,  cause  of  the  injury. 

ILLUSTRATION.— The  owner  of  lands  owes  a 
duty  to  persons  coming  upon  that  land,  and  the  fail- 
ure to  perform  that  duty  is  negligence.  Here,  again, 
we  have  to  consider  who  the  person  is.  I  enter  Wan- 
amaker*s  store  to  make  a  purchase.  In  going  from 
the  second  to  the  third  floor,  I  trip  on  a  defective 
nosing  on  the  stairway.  This  has  been  out  of  order 
for  some  time,  and  the  floor  walker  was  aware  of 
that  fact.  I  have  a  cause  of  action  against  Wana- 
maker's  store  for  failure,  on  their  part,  to  exercise 


418  COMMERCIAL    LAW 

due  care  in  having  the  premises  reasonably  safe  for 
the  use  of  customers.  Suppose,  in  making  a  purchase 
in  that  same  store,  in  the  basement,  I  see  an  open  door 
leading  into  the  engine  room  where  the  heat  genera- 
tor is  located.  Being  interested  in  heating  appliances, 
I  go  into  the  room,  although  there  is  a  sign  above  the 
door  "no  admittance."  I  fall  in  an  unguarded  hole 
in  the  floor,  which  has  been  open  for  a  long  while,  and 
the  existence  of  this  hole  is  known  to  the  manage- 
ment. I  cannot  recover  because  I  am  a  trespasser.  I 
am  in  a  place  where  I  had  no  right  to  be,  and,  as  to 
trespassers,  the  owner  of  property  owes  no  duty,  ex- 
cept to  refrain  from  wilful  attempts  to  injure  such  a 
person.  I  may  not  set  a  trap  in  my  back  yard  to  catch 
a  trespasser,  although  I  owe  no  duty  to  him  to  have 
the  back  yard  safe  for  his  use.  A  peculiar  variation 
in  this  rule  has  been  made  by  some  States,  in  the  so- 
called  turn-tables  cases.  Railroads  maintain  turn- 
tables in  their  yards  for  the  purpose  of  reversing  loco- 
motives and  other  cars.  While  children,  coming  upon 
the  premises,  are  trespassers,  nevertheless,  manj' 
courts  have  held  that  such  things  are  what  might  be 
called  "attractive  nuisances,"  and  in  such  cases  the 
owner  of  property  is  under  special  duty  to  use  care 
even  as  to  trespassers,  to  see  that  they  are  not  in- 
jured. These  are  merely  a  few  of  the  general  prin- 
ciples of  the  law  of  negligence  as  applied  by  the 
courts. 

CAPACITY  OF  PARTIES  IN  TORT  AC- 
TIONS.— We  discussed  the  question  of  the  capacity 
of  parties  in  making  a  contract.    There  is  not  as  much 


COMMERCIAL    LAW  419 

qualification  upon  a  party's  liability  for  tort  as  for 
contract.  To-day,  generally,  a  married  woman  is  liable 
for  her  torts,  the  same  as  any  one  else.  A  corporation  is 
liable  for  its  torts  committed  by  its  agents  or  servants 
in  the  scope  of  their  employment.  An  infant  is  held 
responsible  for  his  torts.  It  is  sometimes  said  that  a 
person  is  liable  for  his  torts  from  the  cradle  to  the 
grave.  This  is  not  strictly  true.  If  a  baby  two  years 
old  puts  his  finger  in  my  eye,  injuring  it,  he  would 
clearly  not  be  liable.  But  a  person  of  tender  years  is 
liable  for  his  torts,  whenever  he  has  sufficient  intelli- 
gence to  know  what  he  is  doing.  Some  courts  place 
the  age  at  seven  years,  while  others  consider  each  in- 
dividual case  and  the  degree  of  intelligence  possessed 
by  the  infant. 

THE  CRIMINAL  LAW.— A  crime  is  a  wrong 
which  the  State  recognizes  as  injurious  to  the  public 
welfare,  and  punishes  in  a  criminal  action  in  its  own 
name.  There  are  certain  leading  principles  of  the 
American  system  of  criminal  law  which  must  be  kept 
in  mind. 

(1)  A  man  is  presumed  to  be  innocent  until  the 
contrary  is  shown,  and  a  jury,  to  be  justified  in  bring- 
ing in  a  verdict  of  guilty,  must  be  satisfied  beyond  a 
reasonable  doubt,  of  the  guilt  of  the  accused.  The  rule 
in  civil  cases  is  that  the  jury  must  find  for  the  plaintiif 
or  defendant  by  a  preponderance  of  evidence.  Thus, 
it  is  possible  for  a  person  to  secure  a  verdict  in  a  civil 
action  for  damages  for  assault  and  batter]'',  v^hile  with 
the  same  evidence,  a  jury  would  not  be  justified,  in  a 
criminal  action  in  convicting  the  defendant. 


420  COMMERCIAL    LAW 

(2)  In  general,  no  person  may  be  tried  for  a 
criminal  offense,  of  any  magnitude,  until  he  has  been 
indicted  by  a  grand  jury.  The  grand  jury  is  generally 
twenty-four  men,  and  hears  the  case  against  the  pris- 
oner only  as  presented  by  the  prosecutor  or  district 
attorney.  If  the  grand  jury  believes  the  evidence  to 
be  sufficient  to  warrant  a  trial  before  the  petit  jury, 
they  bring  in  a  true  bill,  and  then  the  trial  takes  place 
before  the  petit  jury  of  twelve  men,  in  open  court. 
The  prisoner  is  entitled  to  counsel,  at  the  State's  ex- 
pense, if  he  is  not  able  to  furnish  his  own. 

(3)  The  prisoner  may  not  twice  be  put  in 
jeopardy  for  the  same  offense. 

(4)  A  person  may  not  be  tried  under  an  "ex 
post  facto"  law. 

An  "ex  post  facto"  law  is  one  which  makes  an 
act,  which  was  innocent  when  committed,  a  crime. 
Such  laws  are  unconstitutional.  This  term  is  never 
used  in  civil  law,  but  the  term  "retroactive  statute" 
expresses  the  same  idea.  Thus,  a  statute  passed  Jan- 
uary 15,  1920,  providing  that  all  contracts  made  since 
January  1, 1919,  must  be  witnessed  by  three  witnesses, 
would  be  a  "retroactive  statute"  and  not  valid. 

CRIMINAL  RESPONSIBILITY.— As  a  gen- 
eral rule,  if  a  person,  when  a  crime  is  committed,  has 
sufficient  mental  capacity  to  understand  the  nature  of 
the  particular  act  constituting  the  crime,  and  the 
mental  capacity  to  know  whether  it  is  right  or  wrong, 
he  is  liable  criminally,  whatever  may  be  his  capacity 
in  other  respects.  As  in  contracts,  or  torts,  there  is 
a  special  rule  in  regard  to  infants.    The  English  com- 


COMMERCIAL    LAW  421 

mon  law,  which  is  pretty  generally  followed  in  this 
country,  is  that  a  child  under  the  age  of  seven  is  con- 
clusively presumed  incapable  of  committing  a  crime. 
This  is  because  of  the  fact  that  at  common  law,  a 
criminal  intent  was  necessary  in  all  crimes,  and  an 
infant  under  seven  was  presumed  not  sufficiently  ad- 
vanced to  be  able  to  form  a  criminal  intent.  Between 
the  ages  of  seven  and  fourteen,  there  is  a  presumption 
of  incapacity  to  commit  a  crime,  the  presumption  be- 
ing very  strong  near  seven,  and  rather  weak  near 
fourteen.  Between  the  ages  of  fourteen  and  twenty- 
one,  the  presumption  is  that  the  infant  is  capable  of 
committing  a  crime.  As  a  general  rule,  one  person 
is  not  liable  for  the  crimes  of  another,  unless  he  par- 
ticipated in  them,  directly  or  indirectly.  A  partner, 
therefore,  is  not  liable,  criminally,  for  the  acts  of  his 
partners,  merely  because  they  are  his  partners. 
Neither  is  a  principal  or  master  liable  for  the  criminal 
acts  of  his  agent  or  servant,  merely  because  the  rela- 
tionship is  that  of  principal  and  agent  or  master  and 
servant.  We  will  consider  briefly  a  few  of  the  more 
important  crimes. 

HOMICIDE.— Homicide  is  the  killing  of  a  hu- 
man being,  and  is  divided  into  excusable,  felonious, 
and  justifiable  homicide.  The  distinction  between 
excusable  and  justifiable  homicide  is  very  slight  and 
perhaps  of  little  utility.  Where  either  exists,  a  homi- 
cide takes  place  under  such  circumstances  that  the 
party  cannot  strictly  be  said  to  have  committed  the 
act  wilfully  and  intentionally,  or  if  he  does  commit  it 
with  full  intention,  under  such  circumstances  of  duty 


422  COMMERCIAL    LAV/ 

as  to  render  the  act  performed  not  a  felonious  homi- 
cide. A  felonious  homicide  is  committed  wilfully  and 
under  such  circumstances  as  to  render  it  punishable. 
Murder  is  the  wilful  killing  of  any  person  with  malice 
aforethought.  In  some  States,  by  legislative  enact- 
ments, murder  is  divided  into  degrees,  as  murder  in 
the  first  degree  and  murder  in  the  second  degree.  The 
penalty  for  murder  in  the  first  degree  is  death,  or  in  a 
State  where  capital  punishment  is  abolished,  life  im- 
prisonment. There  are  various  other  distinctions  be- 
tween these  two  form.s  of  murder  which  must  be  as- 
certained from  the  statutes  themselves. 

MANSLAUGHTER.— Manslaughter  is  the  un- 
lawful killing  of  another  without  malice,  either  ex- 
press or  implied.  Manslaughter  is  also  frequently 
divided  into  different  degrees,  and  the  punishment 
varies  accordingly.  A  reference  to  the  State  statutes 
is  necessary,  as  in  murder,  to  know  what  the  local 
law  is. 

BURGLARY. — Burglary,  as  a  common  law  of- 
fense, is  the  breaking  and  entering  of  a  dwelling  house 
of  another,  in  the  night  time,  with  the  intent  to  com- 
mit a  felony  therein,  whether  the  felony  be  actually 
committed  or  not.  But  in  most  jurisdictions  the  of- 
fense has  been  extended  by  statute  so  as  to  include 
breaking  and  entries  which  were  not  burglary  at  com- 
mon law.  Unless  changed  by  statute,  it  must  be 
committed  in  the  night  time,  and  there  must  be  both 
a  breaking  and  an  entering.  Breaking  a  window, 
taking  a  pane  of  glass  out,  or  bending  the  nails,  is  a 
breaking.    Cutting  a  wire  netting  on  a  screen  door  is 


COMMERCIAL    LAW  423 

also  a  breaking.  In  such  cases  a  screen  door  is  not 
to  be  considered  as  a  mere  protection  against  flies 
and  mosquitoes,  but  as  a  part  of  the  building.  As  to 
whether  opening  a  door  or  a  window,  already  partly 
open,  constitutes  a  breaking,  the  cases  are  in  conflict. 
Without  the  intent  to  commit  a  felony,  breaking  and 
entering  is  a  bare  trespass,  which  would  not  be  a 
crime.  The  felonious  intent  must  exist  at  the  time 
of  the  breaking  and  entering.  Hence,  if  it  can  be 
proved  satisfactorily  to  a  jury,  that  a  man  broke  into 
a  house  for  a  night's  lodging  only,  he  would  not  be 
guilty  of  burglary.  As  in  homicide,  reference  must 
be  made  to  the  local  statutes  for  the  actual  definition 
of  burglary  and  its  punishment  in  that  jurisdiction. 

FORGERY. — Forgery  is  the  false  making  of  an 
alteration  of  a  writing  to  the  prejudice  of  another 
man's  right.  Forgery  may  be  committed  of  any  writ- 
ing, which,  if  changed,  would  operate  as  the  founda- 
tion of  another  man's  liability.  Hence  a  check  may 
be  forged,  an  assignment  of  a  legal  claim,  an  indorse- 
ment on  any  negotiable  document,  an  acceptance  of 
a  bill  of  exchange,  a  letter  of  recommendation,  a  rail- 
road pass  or  railroad  ticket.  The  penalty  for  forgery 
and  various  other  acts  of  which  it  may  consist,  are  so 
purely  statutory  as  to  make  any  further  comment 
useless. 

LARCENY. — Larceny  is  the  felonious  taking  of 
the  property  of  another,  without  his  consent  and 
against  his  will,  with  the  intent  to  convert  it  to  the 
use  of  the  taker.  The  taking  must  be  with  criminal 
intent,  but  not  necessarily  for  the  sake  of  gain,  al- 


424  COMMERCIAL    LAW 

though  the  property  must  be  of  some  value,  however 
slight.  The  taking  must  be  against  the  consent  of 
the  owner,  and  if  the  consent  is  given,  although  ob- 
tained by  fraud,  the  crime  is  not  larceny.  Larceny 
relates  only  to  personal  property.  Hence  the  state- 
ment made  falsely  concerning  A:  "you  are  a  thief. 
You  stole  my  marie"  (marie  being  a  kind  of  earth), 
is  not  slander,  because  it  is  not  a  charge  of  a  crime 
involving  moral  turpitude,  as  real  property  is  not  the 
subject  of  larceny.  Larceny  is  generally  divided  into 
petty  larceny  and  grand  larceny,  the  difference  be- 
tween the  two  being  generally  the  amount  involved, 
which  varies  with  the  local  legislation. 

ROBBERY. — Robbery,  at  common  law,  is  the 
taking,  with  intent  to  steal,  of  personal  property  in 
possession  of  another,  from  his  person  or  in  his  pres- 
ence, by  violence  or  by  putting  him  in  fear.  In  a 
majority  of  jurisdictions,  statutes  have  been  enacted 
defining  robbery  substantially  in  accord  with  the  com- 
mon law.  It  is  not  necessary  that  the  property  taken 
should  be  the  property  of  the  person  from  whom  it 
is  taken.  As  in  other  crimes,  there  must  be  a  criminal 
intent,  and  so  where,  in  an  indictment,  the  offense 
was  charged  as  robbery,  but  as  proved  was,  at  most, 
an  improper  and  rude  act,  and  intended  only  as  a  joke, 
it  was  held  that  no  robbery  had  been  committed. 


CHAPTER  XIV 


Miscellaneous 

INSOLVENT    DEBTORS  —  "GRAB    LAW."  — 
When  a   debtor  is  insolvent  there  are   several 

things  that  he  may  do.  In  the  first  place  he  may 
do  nothing.  He  may  let  his  creditors  try  to  get  any 
money  out  of  him  if  they  can,  and  in  general  let  the 
creditors  take  the  laboring  oar.  Where  there  is  no 
bankruptcy  lav^  prevailing,  either  State  or  Federal — 
and  that  was  the  situation  in  many  of  the  States  of 
the  Union  prior  to  the  passage  of  the  present  Na- 
tional bankruptcy  lav^^ — a  debtor  might  get  along 
that  way  for  a  long  time.  That  is  one  thing  he 
might  do. 

COMPOSITION  WITH  CREDITORS.— The 
second  thing  the  debtor  may  conceivably  do  is  to  try 
to  make  a  composition  with  his  creditors.  Though 
it  is  the  law  that  receiving  a  smaller  sum  will  not  dis- 
charge a  liquidated  and  undisputed  debt  for  a  larger 
amount,  even  if  it  is  so  agreed,  an  exception  is  made 
in  the  case  of  a  composition  where  a  number  of  credi- 
tors agree  that  each  of  them  will  take  a  smaller  sum 
for  his  claim.  The  debtor  may  try  to  get  his  creditors 
to  do  that,  and  occasionally  he  succeeds. 

GENERAL  ASSIGNMENTS.— A  third  thing 
which  he  may  do  is  to  make  a  general  assignment  of 
all  his  property  to  trustees  in  trust  to  pay  his  credit 
tors  ratably.  Such  an  assignment  is  not  valid  in 
Massachusetts,  though  in  most  States  it  would  be,  if 

425 


426  COMMERCIAL    LAW 

free  from  fraudulent  incidents.  In  Massachusetts  it 
would  not  prevent  his  creditors,  or  any  one  of  them, 
from  attaching  his  property  just  as  if  it  had  not  been 
assigned,  but  if  creditors  assent  to  the  assignment 
then,  to  the  extent  of  their  claims,  the  assignment 
becomes  valid.  In  other  States  the  assent  of  credi- 
tors is  presumed  if  the  assignment  is  not  fraudulent, 
and  therefore  without  any  actual  assent  the  situation 
is  the  same  as  in  Massachusetts  after  assent  of  all 
the  creditors. 

FRAUDULENT  INCIDENTS  IN  GENERAL 
ASSIGNMENTS.— In  every  State  a  general  assign- 
ment under  certain  circumstances  will  be  regarded  as 
fraudulent  against  creditors.  Such  a  conveyance  may 
be  treated  as  void  by  the  creditors,  and  the  property 
conveyed  seized  by  them  as  if  the  debtor  had  made 
no  conveyance.  Some  of  these  incidents  which  may 
make  a  general  assignment  fraudulent  may  be  noted. 
If  the  assignor  was  solvent  when  the  conveyance  was 
made,  the  transaction  is  fraudulent,  for  if  he  has  suffi- 
cient assets  to  pay  his  debts,  the  only  object  the  as- 
signment can  have  is  to  prevent  them  from  being 
paid  at  once,  and  compel  the  creditors  to  wait  until 
the  assignees  under  the  deed  realize  upon  the  prop- 
erty, that  the  debtor  holds,  at  better  advantage  than 
if  a  forced  sale  were  made  at  once.  If  the  assignees 
are  given  unlimited  power  to  continue  business  it  is 
also  fraudulent,  since  the  business  would  in  effect  be 
carried  on  at  the  risk  of  the  debtor.  The  debtor  be- 
ing insolvent  will  lose  nothing  if  the  business  proves 
unprofitable  whereas  if  profitable  there  may  be  a  sur- 


COMMERCIAL    LAW  427 

plus  after  the  payment  of  the  debts.  A  provision 
authorizing  continuance  of  business  so  far  as  is  nec- 
essary to  dispose  of  property  on  hand,  or  to  work 
up  raw  material  on  hand,  is  generally  upheld.  A  pro- 
vision authorizing  sales  upon  credit  is  often,  though 
not  uniformly,  held  fraudulent,  since  it  permits  the 
assignees  to  defer  the  settlement  of  the  estate.  The 
most  important  provisions  likely  to  be  attacked  as 
fraudulent,  however,  are  provisions  in  regard  to  pref- 
erences. Aside  from  bankruptcy  statutes,  it  is  lawful 
for  a  debtor  who  has  insufficient  means  to  pay  all  of 
his  creditors,  to  pay  some  in  full,  though  this  results 
in  the  total  exclusion  of  others.  Accordingly  a  gen- 
eral assignment  of  a  debtor's  property  on  a  trust,  that 
the  assignees  shall  pay  in  full  certain  named  creditors 
and  pay  the  remaining  creditors  ratably  out  of  the 
residue,  has  generally  been  upheld  though  statutes  in 
some  States  have  altered  the  law  in  this  respect.  A 
kind  of  preference  which  is  generally  deemed  fraudu- 
lent, however,  is  one  which  is  made  conditional  on 
the  creditors  giving  the  debtor  a  discharge.  A  gen- 
eral assignment,  unlike  a  bankruptcy  law,  or  a  com- 
position, does  not  free  the  debtor  from  liability  for 
so  much  of  his  debt  as  remains  unpaid.  Debtors  have 
sometimes  sought  to  avoid  this  result  by  making  a 
general  assignment  of  their  property  in  trust  for 
ratable  distribution  among  such  creditors  as  should 
give  the  debtor  a  full  release  and  discharge  of  all 
claims.  Such  a  provision,  attempting,  as  it  does,  to 
impose  as  a  condition  of  a  creditor's  sharing,  that  he 
should  take  his  share  in  full  satisfaction  of  his  claim, 


428  COMMERCIAL    LAW 

is  almost  universally  held  to  make  a  general  assign- 
ment fraudulent.  Under  the  bankruptcy  law,  a  gen- 
eral assignment  may  within  four  months  be  set  aside 
by  bankruptcy  proceedings;  but  a  creditor  who  has 
once  assented  to  a  general  assignment  cannot  there- 
after join  in  a  bankruptcy  petition  against  that  debtor. 
BANKRUPTCY.— The  fourth  and  most  impor- 
tant way,  however,  now,  of  settling  the  estates  of  in- 
solvent persons  is  provided  by  statute.  The  Federal 
Constitution  gives  Congress  power  to  pass  uniform 
laws  on  the  subject  of  bankruptcy  throughout  the 
United  States,  and  the  Supreme  Court  has  held  that 
when  the  Federal  Government  has  not  taken  advan- 
tage of  this  privilege  given  by  the  Constitution,  States 
have  power  themselves  to  enact  bankruptcy  laws.  In 
some  States  there  were  such  laws,  but  in  many  there 
were  not.  The  Federal  law  now  supersedes  all  State 
laws  on  the  subject.  It  was  passed  in  1898,  and  under 
that  law  the  debtor  may  either  become  a  bankrupt  by 
his  own  voluntary  petition,  or  his  creditors  may  peti- 
tion him  into  bankruptcy  if  he  commits  what  is  called 
an  "act  of  bankruptcy."  This  is  true,  at  least,  if  the 
debtor  is  an  individual,  or  is  a  moneyed  business  or 
commercial  corporation  (except  railroads,  insurance 
companies,  and  banking  corporations).  When  cor- 
porations of  the  excepted  class  become  insolvent,  their 
affairs  are  settled  by  still  a  fifth  method — receivership. 
A  special  privilege,  also,  is  given  to  wage  earners  and 
farmers.  They  may,  if  they  choose,  become  volun- 
tary bankrupts,  but  are  not  liable  to  involuntary  pro- 
ceedings. 


COMMERCIAL   LAW  429 

PETITIONS  IN  BANKRUPTCY.— Suppose  a 
debtor  wishes  to  become  bankrupt  himself.  He  files 
a  petition  in  the  United  States  District  Court,  which 
is  the  court  of  bankruptcy  jurisdiction,  and  is  imme- 
diately adjudicated  a  bankrupt.  If  his  creditors  want 
to  make  him  a  bankrupt  it  is  necessary  that  three  of 
them,  having  claims  amounting  to  not  less  than  $500 
in  the  aggregate,  should  join,  unless  there  are  less 
than  twelve  creditors  in  all.  In  that  event  one  credi- 
tor only  may  petition.  This  petition  must  set  forth 
(1)  the  creditors'  claims,  (2)  the  fact  that  the  debtor 
has  committed  an  act  of  bankruptcy,  and  (3)  the  fact 
that  he  owes  debts  aggregating  $1,000  or  more.  How- 
ever slight  his  indebtedness,  if  he  cannot  pay  it,  a  man 
may  be  a  voluntary  bankrupt,  but  he  must  owe  at 
least  $1,000  to  be  liable  to  involuntary  proceedings. 

ACTS  OF  BANKRUPTCY— FRAUDULENT 
CONVEYANCES.— Now  what  are  the  acts  of  bank- 
ruptcy which  render  a  debtor  liable  to  a  petition  by 
his  creditors?  In  the  first  place  a  fraudulent  convey- 
ance is  an  act  of  bankruptcy.  Reference  to  a  fraudu- 
lent conveyance  by  general  assignment  has  been 
made;  but  there  are  many  kinds  of  fraudulent  con- 
veyances. If  a  debtor  who  is  insolvent,  or  who  is 
made  insolvent  through  a  gift  made  by  himself,  should 
give  away  a  portion  of  his  property,  that  would  be  a 
fraudulent  conveyance,  irrespective  of  the  debtor's 
intent,  because  the  necessary  effect  of  the  gift  would 
be  to  hinder,  delay  and  defraud  his  creditors.  It  would 
be  a  fraudulent  conveyance  for  a  debtor  to  seek  to 
conceal  his  property  from  his  creditors  by  putting  it 


430  COMMERCIAL    LAW 

in  the  hands  of  some  kind  friend  to  hold  for  him  until 
his  creditors  should  cease  to  be  so  troublesome  as  at 
the  present  time.  It  would  be  a  fraudulent  convey- 
ance for  a  man  who  is  pressed  by  creditors  to  turn 
himself  into  a  corporation  for  business  purposes,  and 
assign  all  his  property  to  that  corporation.  This 
transfer  to  a  corporation,  even  though  done  openly, 
would  necessarily  hinder  and  delay  his  creditors. 

PREFERENCES.— As  has  already  been  said, 
paying  one  creditor  to  the  exclusion  of  others  is  not 
a  fraudulent  conveyance,  but  it  is  a  preference,  and  a 
preference  is  a  second  act  of  bankruptcy.  Either  for 
the  debtor  to  give  a  preference  himself  or  to  allow  a 
creditor  to  get  a  preference,  by  legal  proceedings,  is 
an  act  of  bankruptcy.  Any  transfer  made  by  an  in- 
solvent debtor,  to  pay  or  to  secure  in  whole  or  in  part 
a  previously  existing  debt,  is  a  preference. 

GENERAL  ASSIGNMENTS.— A  general  as- 
signment, whether  fraudulent  or  not,  is  an  act  of 
bankruptcy.  The  consequence  is,  therefore,  that  if  a 
debtor  makes  a  general  assignment,  his  creditors  have 
the  choice  of  letting  it  stand  and  having  the  estate 
settled  under  the  general  assignment,  or  of  setting  it 
aside  and  having  bankruptcy  proceedings. 

RECEIVERSHIPS.— Still  another  act  of  bank- 
ruptcy is  the  appointment  of  a  receiver  on  account 
of  insolvency.  There,  also,  the  creditors  virtually 
have  an  option  of  letting  the  receivership  stand  and 
having  the  receiver  take  charge  of  the  distribution 
of  the  assets,  or  of  petitioning  the  debtor  into  bank- 
ruptcy and  having  the  bankruptcy  court  take  charge. 


COMMERCIAL    LAW  431 

ADMISSION  OF  INABILITY  TO  PAY 
DEBTS. — One  further  act  of  bankruptcy  is  an  ad~ 
mission  by  the  debtor  of  his  inability  to  pay  his  debts 
and  his  willingness  to  be  adjudicated  a  bankrupt.  An 
act  of  bankruptcy  can  form  the  basis  of  a  petition 
only  within  four  months  after  its  commission. 

INSOLVENT  DEBTORS  USUALLY  COM- 
MIT ACTS  OF  BANKRUPTCY.— Now  an  insolv- 
ent debtor  cannot  very  well  avoid  committing  one  of 
these  acts  of  bankruptcy.  He  can  avoid  making  a 
fraudulent  conveyance,  but  he  will  find  it  pretty  hard 
to  avoid  making  a  preference.  He  need  not,  it  is  true, 
pay  any  of  his  debts,  and  it  is  not  a  preference  to  pay 
money  out  for  present  consideration,  or  to  transfer 
property  for  present  consideration,  as  to  make  a  mort- 
gage for  a  new  loan;  but  it  will  be  hard  for  him  to 
prevent  creditors  from  getting  a  preference  by  legal 
proceedings,  at  least  if  the  debtor  has  any  assets  at 
all ;  for  if  the  debtor  does  not  pay  any  of  his  creditors, 
some  of  his  creditors  will  sue  him,  get  execution,  and 
endeavor  to  levy  it  on  the  debtor's  property. 

PROCEDURE  AFTER  ADJUDICATION.— 
If  a  debtor  has  once  been  adjudicated  a  bankrupt,  it 
makes  no  difference  whether  it  was  on  a  voluntary 
petition  or  an  involuntary  petition;  the  matter  goes 
on  in  both  cases  the  same  way.  The  first  thing,  after 
the  adjudication,  is,  that  the  referee,  a  sort  of  sub- 
ordinate judge,  requires  the  bankrupt  to  submit  sched- 
ules of  his  assets  and  of  his  creditors.  The  debtor  is 
induced  to  make  these  schedules  as  complete  as  pos- 
sible, for  the  following  reasons:  if  the  schedule  of 


432  COMMERCIAL   LAW 

assets  is  knowingly  incomplete,  the  debtor  is  com- 
mitting a  crime  and  is  likely  to  be  shut  up  in  jail.  If 
the  schedule  of  his  creditors  is  incomplete,  any  credi- 
tor who  is  left  out  or  whose  address  is  so  incorrectly 
given  that  the  creditor  does  not  get  notice  of  the  pro- 
ceedings in  time  to  prove  his  claim,  is  not  affected 
by  the  discharge ;  and  as  the  debtor  wants  a  discharge 
from  as  many  debts  as  possible,  he,  of  course,  will 
make  his  schedule  of  creditors  as  complete  as  possi- 
ble. From  this  schedule  of  creditors,  the  referee  sends 
notices  out  to  all  the  creditors  to  meet  and  choose  the 
trustee.  The  creditors  meet  and  choose  a  trustee, 
who  then  endeavors  to  collect  the  assets  of  the  estate, 
and  under  the  direction  of  the  court,  pays  dividends 
from  the  assets  to  the  creditors. 

PROPERTY  WHICH  THE  TRUSTEE  GETS. 
— The  question  may  be  asked :  "What  property  does 
the  trustee  get?"  He  gets  all  tangible  property  that 
the  debtor  could  transfer  at  the  moment  of  his  bank- 
ruptcy. He  gets  intangible  property,  patents,  trade- 
marks, copyrights,  seats  on  the  stock  exchange,  and 
good-will  of  a  business,  with  the  exception  that  the 
debtor  still  retains  the  right  to  carry  on  his  old  busi- 
ness himself,  in  the  future,  in  his  own  name.  The 
trustee  gets  rights  of  action  of  the  bankrupt,  except 
personal  rights  of  action,  as  they  are  called.  These 
consist  of  rights  of  action  for  personal  injuries,  as 
for  assault,  or  for  personal  injury  by  negligence.  A 
right  of  action  for  breach  of  promise  of  marriage  also 
would  not  pass  to  the  trustee  in  bankruptcy.  Not 
only  does  a  trustee  get  this  tangible  and  intangible 


COMMERCIAL   LAW  433 

property,  but  he  gets  also  a  right  to  recover  any  prop- 
erty fraudulently  conveyed  by  the  bankrupt,  which 
is  not  in  the  hands  of  a  bona  fide  purchaser,  even  if 
the  fraudulent  conveyance  was  made  years  before, 
provided  the  statute  of  limitations  has  not  completely 
run  against  it.  Any  preference,  also  made  within 
four  months  before  the  filing  of  the  petition  in  bank- 
ruptcy, may  be  recovered  from  the  preferred  creditor, 
if  he  had  reasonable  cause  to  believe,  when  he  re- 
ceived it,  that  he  was  getting  a  preference,  but 
not  otherwise.  The  trustee  in  bankruptcy  gets  the 
debtor's  life  insurance  policies,  except  in  so  far  as 
they  are  made  exempt  by  statute.  Life-insurance 
policies,  in  favor  of  a  beneficiary  other  than  the  in- 
sured himself,  are  exempt,  though  if  the  premiums 
were  paid  by  the  debtor  while  insolvent,  the  pre- 
miums so  paid  within  the  past  six  years  may  be  re- 
covered, and  the  beneficiary  would  in  effect  have  to 
pay  those  premiums  back  in  order  to  hold  the  policy. 
Even  if  the  policy  runs  to  the  insured  himself,  in  his 
own  name,  he  has  the  privilege,  under  the  bankruptcy 
act,  to  redeem  it  from  the  trustee  in  bankruptcy  by 
paying  its  cash  surrender  value.  Property  acquired 
by  the  bankrupt,  after  the  beginning  of  bankruptcy 
proceedings,  does  not  pass  to  the  trustee.  The  bank- 
rupt's property  passes  free  of  attachment  or  judg- 
ment liens,  secured  by  creditors  within  four  months 
prior  to  the  beginning  of  bankruptcy  proceedings. 
This  has  no  bearing  on  a  case,  where,  prior  to  bank- 
ruptcy, money  has  been  actually  collected  by  legal 
proceedings,  but  only  to  cases  of  seizure  under  legal 


434  COMMERCIAL   LAW 

proceedings  which  are  still  pending  at  the  time  the 
petition  is  filed.  If  a  debtor  becomes  bankrupt,  within 
four  months  after  his  property  is  attached,  the  at- 
tachment is  dissolved.  If  the  debtor  does  not  become 
bankrupt  until  after  four  months,  the  attachment  is 
a  valid  lien  on  the  property  attached,  and  so  far  as 
the  property  is  sufficient  to  pay  the  creditor,  he  can 
collect  his  claim  from  it,  even  though  the  debtor  be- 
comes bankrupt  before  the  creditor  finally  gets  judg- 
ment and  collects  his  claim. 

PROOF  OF  CLAIMS.— The  trustee  collects  all 
this  property  and  tries  to  reduce  it  to  cash,  as  fast  as 
he  can,  and  while  this  is  going  on,  creditors  will  also 
be  proving  their  claims.  It  is  only  claims  which  exist 
at  the  time  of  filing  the  petition  which  are  provable, 
but  the  debts  need  not  be  due  at  the  time  of  the  bank- 
ruptcy; it  is  only  essential  that  they  shall  be  in  ex- 
istence. Interest  is  added  or  rebated,  as  the  case 
may  be,  to  the  date  of  filing  the  petition.  That  is,  if 
you  have  a  non-interest-bearing  note  falling  due  July 
1,  and  the  debtor  becomes  bankrupt  May  1,  the  face 
of  the  note  will  be  proved  less  a  rebate  of  two  months' 
interest  to  May  1,  because  the  present  value  of  the 
note  on  May  1  is  what  is  provable.  On  the  other 
hand,  if  the  note  had  been  due  on  April  1,  interest 
would  be  added  up  to  the  date  of  filing  the  petition, 
and  if  the  note  was  an  interest-bearing  note,  of  course 
the  interest  would  be  provable  up  to  May  1,  even  if 
the  note  did  not  fall  due  until  July  1  or  later.  Debts, 
arising  subsequently  to  the  date  of  filing  the  petition, 
must  be  enforced  against  the  bankrupt's  assets  ac- 


COMMERCIAL    LAW  435 

quired  after  his  bankruptcy.  Claims  for  tort  are  not 
provable,  that  is,  claims  for  injuries  to  person  or  prop- 
erty not  arising  out  of  contact.  But  a  judgment  for 
tort,  obtained  before  the  filing  of  the  petition,  is  prov- 
able. There  has  been  a  good  deal  of  trouble  in  regard 
to  what  are  called  contingent  claims.  The  common- 
est instance  is  the  indorser's  liability  on  a  note  which 
is  not  yet  due  when  the  indorser  becomes  bankrupt. 
At  the  time  of  filing  the  petition,  the  indorser's  liabil- 
ity is  contingent  on  the  possibility  that  the  maker  may 
not  pay  the  note  at  maturity,  and  that  notice  of  dis- 
honor will  be  given  to  the  indorser.  Creditors,  who 
have  received  a  preference,  cannot  prove  claims  unless 
they  have  surrendered,  within  four  months  of  the 
bankruptcy,  any  preference  which  they  have  received 
with  reasonable  cause  to  believe  that  it  was  a  prefer- 
ence. Secured  creditors  can  realize  on  their  security 
and  then  prove  for  the  balance  of  their  claims.  A 
few  claims  are  given  priority  over  others  and  paid  in 
full  before  any  dividend  to  other  creditors.  The  most 
important  claims  of  this  sort  are  the  wages  of  work- 
men, clerks  or  servants  earned  within  three  months 
of  the  bankruptcy  and  not  exceeding  the  sum  of 
$300. 

LEASES. — Leases  belonging  to  the  bankrupt 
pass  to  the  trustee  in  bankruptcy,  if  he  wants  them, 
but  the  trustee  in  bankruptcy  need  not  take  any  kind 
of  property  which  seems  more  burdensome  than  ben- 
eficial to  him,  and  as  a  trustee  would  have  to  pay,  the 
rent  under  a  lease  in  full,  if  he  took  it,  he  frequently 
will  prefer  to  abandon  it.    The  landlord  can  prove  for 


436  COMMERCIAL   LAW 

rent,  which  is  already  accrued,  but  he  cannot  prove 
for  rent  which  has  not  already  accrued,  even  though 
part  of  the  period  for  which  the  rent  is  claimed  has 
elapsed,  unless  there  is  a  special  covenant  in  the  lease. 
If  the  trustee  in  bankruptcy  assumed  the  lease,  then, 
of  course,  the  landlord  would  look  to  the  trustee  for 
the  rest  of  the  term.  If  the  trustee  did  not  assume 
the  lease,  the  landlord  would  have  his  option  of  doing 
either  of  two  things:  he  could  leave  the  bankrupt  in 
the  premises  and  have  a  right  of  action  against  him 
for  the  rent,  from  time  to  time,  as  it  accrued,  or  he 
could  eject  the  tenant;  but  if  he  ejected  the  tenant 
he  could  not  hold  him  for  rent.  Generally  he  would 
eject  a  bankrupt  tenant  rather  than  let  him  stay. 

SET-OFF.— Set-off  may  be  made  by  a  debtor  of 
the  estate  who  also  has  a  claim  against  the  estate.  He 
does  not  have  to  prove  his  claim,  taking  a  dividend 
on  it  and  then  paying,  in  full,  the  debt  which  he  owes 
to  the  estate.  He  may  set  one  off  against  the  other, 
but  he  is  not  allowed  to  acquire  claims  for  the  pur- 
pose of  set-off  within  four  months  prior  to  bank- 
ruptcy. Otherwise,  one  owing  money  to  an  insolvent 
debtor,  could  buy  up  at  a  discount  claims  against  the 
debtor,  equal  in  amount  to  his  indebtedness  to  the 
bankrupt. 

EXAMINATION  AND  DISCHARGE  OF 
BANKRUPT. — The  bankrupt  may  be  examined  by 
any  creditor  with  a  view  to  the  disclosure  of  his  as- 
sets. This  is  a  most  important  right.  Finally,  if 
in  every  respect,  he  obeys  the  bankruptcy  law,  the 
debtor  gets  a  discharge.    Grounds  for  refusing  him 


COMMERCIAL   LAV/  437 

a  discharge  are,  that  he  has  made  a  fraudulent  con- 
veyance; that  he  has  obtained  credit  by  false  repre- 
sentation ;  thatthe  has  failed  to  keep  books  of  account 
for  the  purpose  of  concealing  his  financial  condition ; 
that  he  has  committed  an  offence  punishable  by  the 
bankruptcy  law,  as  making  a  false  oath  or  refusal  to 
disclose  his  property  or  to  submit  to  examination; 
and  finally  a  debtor  who  has  already  been  discharged 
in  bankruptcy  within  the  previous  six  years  cannot, 
as  a  voluntary  bankrupt,  again  obtain  a  discharge. 
These  are  reasons  for  refusing  a  discharge  altogether, 
but  even  though  a  discharge  is  granted,  certain 'liabili- 
ties are  not  discharged.  Claims  for  obtaining  prop- 
erty by  false  pretences,  or  for  false  representations, 
are  not  discharged.  Claims  for  defalcation  or  em- 
bezzlement, as  a  public  officer  or  as  a  fiduciary,  and 
claims  for  wilful  and  malicious  injury  to  the  property 
of  another,  are  not  discharged.  Nor  are  taxes  or 
claims  for  alimony  or  for  the  support  of  a  wife  or  de- 
pendent children. 

COMPOSITION  IN  BANKRUPTCY.  — At 
common  law  it  was  necessary  to  have  the  consent  of 
all  a  debtor's  creditors  in  order  to  make  the  composi- 
tion operative  as  against  all  of  them.  In  bankruptcy 
there  is  a  special  provision  for  composition,  and  with 
the  approval  of  the  court,  a  composition  may  be  de- 
clared binding,  not  only  as  against  those  who  have 
assented  to  it,  but  as  against  all  creditors  having 
provable  claims,  if  a  majority  in  number  and  amount 
of  the  creditors,  taking  part  in  the  bankruptcy  pro- 
ceedings, assent  to  the  discharge. 


438  COMMERCIAL   LAW 

INSURANCE. — Insurance  is  a  contract  where- 
by, for  an  agreed  premium,  one  party  undertakes  to 
compensate  the  other  for  loss  on  a  specified  subject 
from  specified  perils.  Policies  of  insurance  are  as 
various  as  the  contracts  which  they  cover.  In  1779, 
Lloyd's  adopted  a  standard  form  of  marine  policy, 
which,  with  some  changes,  is  in  practically  universal 
use  in  the  British  world.  A  standard  form  of  fire 
policy  has  been  adopted  by  many  of  the  fire  insurance 
companies  in  the  United  States. 

POLICY  PROVISIONS.— Certain  terms  occur 
frequently  in  insurance  law,  with  which  one  should 
be  familiar.  A  valued  policy  is  one  upon  which  a 
definite  valuation  is  put,  by  agreement  of  both  parties, 
on  the  subject  matter  of  the  insurance  written  on  the 
policy;  for  example,  a  policy  "insuring  the  S.S.  George 
Washington,  valued  at  $1,000,000."  An  open  policy, 
on  the  other  hand,  is  one  in  which  a  definite  sum  is 
written  on  the  face  of  the  policy,  but  instead  of  agree- 
ing as  to  the  value  of  the  property  insured,  indicates 
the  limit  of  recovery  in  case  of  the  destruction  of  the 
property.  Floating  policies  are  such  as  cover  articles 
which  cannot  be  designated  with  certainty,  as  for  ex- 
ample, a  constantly  changing  stock  of  goods.  In  life 
insurance  there  are  many  kinds  of  policies.  Probably 
the  most  common  is  the  regular  life,  under  which  the 
insured  pays  certain  fixed  premiums  throughout  life, 
and  the  beneficiary  receives  the  amount  of  the  policy 
only  upon  the  death  of  the  insured.  Life  insurance 
policies  in  which  the  investment  feature  is  prominent, 
are  generally  called  endowment  policies,  and  they  re- 


COMMERCIAL    LAW  439 

quire  the  insured  to  pay  a  certain  premium,  annually, 
for  a  certain  number  of  years.  If  the  insured  dies 
before  premium  payments  cease,  under  the  terms  of 
the  policy,  the  beneficiary  receives  the  full  amount 
of  the  policy.  If  the  insured  lives  beyond  the  stated 
period,  he  is  entitled  to  receive  the  amount  written 
on  the  face  of  the  policy  or  he  may  be  allowed  to  re- 
ceive a  paid-up  policy  for  some  specified  sum.  A 
policy  of  reinsurance  is  simply  a  contract  made  by 
one  insurance  company  with  another,  whereby  the 
first  reinsures  with  the  second  some  individual  risk 
which  it  has  itself  accepted  and  insured. 

ELEMENTS  OF  CONTRACT.— In  order  that 
the  contract  of  insurance  shall  be  valid,  it  must  pos- 
sess all  the  essential  elements  of  the  ordinary  con- 
tract. Although  there  is  a  certain  element  of  chance 
in  an  insurance  contract,  it  is  always  held  that  it  is 
not  in  the  nature  of  a  gambling  contract.  A  peculiar 
feature  of  this  contract  is  that  it  is  one  of  the  utmost 
good  faith,  and  requires  that  each  party  shall  disclose 
to  the  other  all  material  facts  in  his  knowledge  that 
may  affect  the  making  of  the  contract. 

INSURABLE  INTEREST.— An  essential  ele- 
ment in  the  law  of  insurance  is  that  of  insurable  in- 
terest. By  this  term  we  mean  that  interest  of  the  in- 
sured, which  is  exposed  to  injury  by  reason  of  the 
peril  insured  against.  Such  interest  does  not  nec- 
essarily need  to  be  a  legal  right,  but  only  such  as  to 
justify  a  reasonable  expectation  of  financial  benefit, 
which  will  be  derived  by  the  continued  existence  of 
the  person  or  property  insured.  While  it  is  difficult  to 


440  COMMERCIAL   LAW 

define  accurately  an  insurable  interest  in  property, 
Section  2546  of  the  California  Civil  Code  defines  it 
thus:  "Every  interest  in  property,  or  any  relation 
thereto,  or  liability  in  respect  thereof,  of  such  a  nature 
that  a  contemplated  peril  might  directly  damnify  the 
insurer,  is  an  insurable  interest."  In  life  insurance, 
an  insurable  interest  is  requisite,  but  this  interest,  if 
existing  at  the  time  the  policy  is  issued,  is  sufficient, 
although  such  interest  subsequently  terminates.  Ev- 
ery person  has  an  insurable  interest  in  his  own  life, 
or  he  may  procure  insurance  on  the  life  of  another, 
when  so  related  to  that  other,  either  by  reason  of 
blood,  marriage,  or  commerce,  that  he  has  well- 
grounded  expectation  of  deriving  benefit  from  that 
other's  life,  or  suffering  detriment  through  its  termi- 
nation. It  is  well  settled  that  a  creditor  has  an  insur- 
able interest  in  the  life  of  his  debtor.  The  courts 
are  not  clear  as  to  just  how  much  this  interest  is,  but 
it  will  not  be  allov/ed  to  greatly  exceed  the  sum  of  the 
debt.  The  relationship  between  the  insured  and  the 
insurer  is  governed,  to  a  very  large  extent,  by  the  law 
of  agency. 

SURETYSHIP  AND  GUARANTY.— Surety- 
ship has  been  defined  as  an  accessory  agreement  by 
which  one  binds  himself  for  another  who  is  already 
bound.  A  surety  is  a  person  who  is  liable  to  perform 
any  act,  that  his  principal  is  bound  to  perform,  in 
the  event  that  his  principal  fails  to  perform  as  agreed. 
Where  there  is  more  than  one  surety,  the  parties  are 
known  as  co-sureties.  The  distinction  between  the 
contract  of  suretyship  and  that  of  guaranty  is  not  al- 


COMMERCIAL   LAW  441 

together  clear,  and  frequently  not  observed  by  the 
courts.  So  far  as  the  distinction  can  be  defined,  we 
may  say  that  if  the  parties  undertake  to  pay  money, 
or  to  do  some  other  agreed  act,  in  case  the  principal 
fails  to  perform  his  part,  then  they  are  sureties.  On 
the  other  hand,  if  they  assume  performance,  only  in 
the  event  that  the  principal  is  unable  to  perform,  then 
they  are  guarantors.  The  principles  which  apply  to 
both,  are,  in  many  respects,  similar.  The  terms  used 
by  the  parties  are  not  necessarily  conclusive  as  to 
whether  it  is  a  suretyship  or  guaranty  relationship. 
For  example,  in  the  case  of  Saint  v.  Wheeler,  etc., 
Mfg.  Co.,  95  Ala.  362,  where  a  contract  was  under 
seal  by  which  the  parties  "guarantee,"  along  with  one 
of  their  number,  to  pay  absolutely  and  irrespective  of 
solvency  or  insolvency,  all  damages  which  might  re- 
sult, etc.,  it  was  held  that  the  contract  was  one  of 
suretyship,  and  not  of  guaranty,  although  they  had 
used  the  express  term  "guarantee"  in  the  language  of 
the  contract. 

QUALIFICATION  OF  A  SURETY.— A  surety 
may  be  distinguished  from  an  indorser  in  that  the 
undertaking  of  the  surety  is  absolute,  whereas  that  of 
the  indorser  is  conditional.  The  Negotiable  Instru- 
ments Act  provides  that  a  general  indorser  "engages 
that  on  due  presentment,  it  (the  instrument)  shall 
be  accepted  or  paid,  or  both,  as  the  case  may  be,  ac- 
cording to  its  tenor,  and  that  if  it  be  dishonored,  and 
the  necessary  proceedings  on  dishonor  be  duly  taken, 
he  will  pay  the  amount  thereof  to  the  holder,  or  to 
any  subsequent  indorser  who  may  be  compelled  to 


442  COMMERCIAL   LAW 

pay  it."  Hence,  if  an  indorser  is  not  notified,  or  if 
the  instrument  is  not  protested,  if  that  is  necessary, 
he  is  discharged. 

PRINCIPAL  AND  SURETY.— Ordinarily,  the 
relationship  of  principal  and  surety  is  entered  into 
under  the  terms  of  a  contract,  the  chief  object  of 
which  is  the  creation  of  the  relationship.  As  a  general 
rule,  any  person  who  is  capable  of  making  a  contract 
may  be  surety.  Formerly,  it  was  sometimes  said  that 
an  infant  was  absolutely  unqualified  to  make  a  con- 
tract of  this  kind,  but  now  his  contracts  of  surety- 
ship are  held  to  be  voidable,  the  same  as  his  other 
contracts.  In  some  states  a  married  woman  is  still 
prevented  by  statute  from  becoming  a  surety  for  her 
husband.  Like  ordinary  contracts,  a  contract  of  sure- 
tyship must  be  supported  by  sufficient  consideration. 
It  is  ordinarily  a  collateral  engagement  to  pay  a  debt 
of  another,  and  hence,  comes  under  the  section  of  the 
Statute  of  Frauds  which  requires  a  contract  to  an- 
swer for  the  "debt,  default,  or  miscarriage  of  another," 
to  be  in  writing. 

SURETYSHIP  LIABILITY.— The  general  ex- 
tent of  the  suretyship  liability  is  measured  by  the 
contract  of  the  principal,  which  he  guarantees.  If 
no  cause  of  action  can  be  maintained  against  the  prin- 
cipal on  the  contract,  it  follows  necessarily  that  the 
surety  is  not  liable.  The  tendency  of  the  courts  is  to 
favor  the  surety.  His  obligation  is  ordinarily  assumed 
without  any  pecuniary  compensation,  and  it  is  ac- 
cordingly said  that  his  liability  is  "strictissimi  juris/' 
(strictly  construed  by  the  law).     A  surety  has  the 


COMMERCIAL    LAW  443 

right,  then,  to  insist  upon  the  very  letter  of  his  con- 
tract, and  if  there  is  a  reasonable  doubt  as  to  whether 
his  contract  requires  the  doing  of  certain  acts  or  not, 
that  doubt  should  be  resolved  by  the  court  in  favor  of 
the  surety.  Consequently,  a  surety  will  not  ordi- 
narily be  held  liable  for  any  default  of  the  principal, 
which  occurred  prior  to  the  surety's  contract  to  be 
such.  The  death  of  the  surety  does  not  necessarily 
terminate  his  liability,  and  his  personal  representa- 
tives will  be  responsible  for  the  carrying  out  of  his 
contract,  especially  where  the  contract  reads  that  the 
surety  "binds  his  heirs,  executors  and  administra- 
tors." 

SURETY'S  OBLIGATION  UNDER  NEV/ 
CONTRACT.— It  frequently  happens  that  the  prin- 
cipal's contract  is  not  completed,  and  a  renewal  is 
necessary.  The  question  arises  whether  the  surety's 
obligations  are  continued  under  the  new  contract,  the 
same  as  under  the  old.  The  principle  which  the  courts 
apply  is  that  if  the  renewal  amounts  to  an  entirely 
new  contract,  then  the  surety's  obligation  is  at  an  end. 
But  if  the  renewal  is  simply  a  part  of  the  original 
contract,  and  does  not  call  for  any  new  contract,  his 
obligation  continues  under  such  renewal.  As  the  con- 
tract between  the  principal  and  surety  is  of  a  more 
or  less  confidential  character,  the  law  requires,  as  we 
have  mentioned  in  insurance,  the  exercise  of  the  ut- 
most good  faith  on  the  part  of  the  principal.  Hence, 
if  a  surety,  before  entering  into  his  contract,  applies 
to  the  principal  for  information  about  any  material 
matter  pertaining  to  the  contract,  the  principal  is 


444  COMMERCIAL   LAW 

bound  to  give  full  information  as  to  every  fact  within 
his  knowledge,  and  if  he  does  anything  to  deceive  the 
surety,  he  vitiates  the  contract.  Another  application 
of  the  same  principle  is  found  in  the  rule  that  the 
principal  must  not  do  any  act  injurious  to  the  surety 
or  inconsistent  with  his  rights.  Consequently,  if  the 
principal  makes  any  arrangement  with  his  principal 
debtor,  by  which  the  risk  of  the  surety  is  materially 
increased,  or  the  terms  of  the  contract  are  altered  or 
varied  or  the  time  of  payment  is  extended,  the  surety 
in  any  of  these  cases  would  be  released  from  any  lia- 
bility unless  he  is  consulted  and  gives  his  assent  to 
such  changes  in  his  contract.  It  is  necessary  that  the 
new  contract,  which  the  principal  makes,  be  a  valid 
contract  in  order  to  release  the  surety.  Hence,  if  the 
principal  makes  a  contract  extending  the  time  of  the 
payment  on  the  obligation  six  months,  and  that  is 
all  there  is  to  the  contract,  such  extension  agreement 
would  be  invalid  because  of  lack  of  consideration,  and 
the  surety  in  such  case  would  not  be  discharged  from 
his  liability  under  the  old  contract.  If  the  obligation 
which  the  surety  undertakes  to  pay  is  a  promissory 
note,  an  agreement  by  the  principal  to  extend  the 
time  of  payment,  would  not,  of  itself,  release  the 
surety,  there  being  no  consideration.  A  part  payment 
made  by  the  maker,  before  the  note  was  due,  for 
which  an  extension  of  time  to  pay  the  remainder  is 
granted,  would  be  binding,  because  such  part  pay- 
ment, before  a  note  is  due,  constitutes  good  consider- 
ation for  an  agreement  to  extend  the  time  to  pay  the 
balance,  and  consequently  the  surety  is  discharged. 


COMMERCIAL    LAW  445 

NEGLIGENCE  OF  THE  CREDITOR.— It  is 
generally  true  that  the  creditor  is  under  no  obligation 
to  be  diligent  in  the  pursuit  of  the  debtor.  Conse- 
quently, a  mere  negligence  of  the  creditor,  to  sue  or 
otherwise  attempt  to  collect  a  claim  against  his  debt- 
or, although  there  is  a  surety  for  the  creditor,  does 
not  relieve  the  surety  of  his  liability.  Mere  delay, 
then,  in  proceeding  against  the  principal  debtor,  does 
not  release  the  surety,  unless  there  is  between  the 
creditor  and  principal  debtor  a  valid  and  binding 
agreement,  under  which  a  delay  does  prejudice  the 
surety. 

DISCHARGE  OF  SURETY.— A  surety  is  dis- 
charged by  the  payment  or  performance,  by  the  prin- 
cipal, of  the  condition  in  the  agreement.  It  is  even 
held  that  the  surety  is  discharged  if  a  tender  of  pay- 
ment has  been  made  to  the  principal,  after  the  debt 
is  due,  and  it  is  refused  by  him.  In  such  a  case,  the 
tender  amounts  practically  to  a  payment  of  the  debt 
and  a  new  loan  creating  a  new  contract.  It  sometimes 
occurs  that  the  creditor  has  collateral  security  for  the 
payment  of  the  debt,  or  secures  control  of  money  or 
property  of  the  debtor  and  which  he  may  lawfully 
apply  to  the  debtor's  obligations  under  certain  cir- 
cumstances. The  principal  may  voluntarily  surrender 
or  dispose  of  these  securities.  In  such  a  case,  the 
surety  is  discharged  from  liability  to  the  extent  of 
the  value  of  the  securities  disposed  of  or  surrendered. 
Of  course,  the  surety  is  not  discharged  where  the 
principal  takes  additional  securities,  or  if  some  secu- 
rities are  given  up  and  sufficient  are  retained  by  the 


446  COMMERCIAL    LAW 

principal  to  pay  the  debt,  the  surety  is  not  relieved 
and  cannot  complain,  for  the  reason  that  he  has  not 
been  injured. 

RIGHTS  OF  SURETY.— It  is  a  well  established 
rule  of  law  that  where  the  surety  is  obliged  to  make 
good  on  his  contract  he  is  entitled  to  relief,  the  law  im- 
plying a  promise  on  the  part  of  the  principal  to  reim- 
burse the  surety  for  any  damages  which  he  suffers. 
Of  course,  this  assumes  that  the  surety  was  legally 
bound  to  pay  the  debt.  If  he  pays  it  because  it  is  a 
moral  obligation  or  for  any  other  reason  which  the 
law  does  not  recognize  as  legally  binding,  he  is  not 
able  to  compel  the  principal  to  reimburse  him. 

RIGHT  OF  CONTRIBUTION.— One  of  the 
peculiar  remedies,  which  the  courts  of  equity  have 
developed,  is  that  of  contribution.  This  right  is  fre- 
quently used  in  the  law  of  suretyship.  When  one  of 
two  or  more  sureties,  for  the  same  obligation,  has 
paid  more  than  his  share  of  the  debt,  he  is  entitled 
to  be  reimbursed  for  the  excess  by  his  co-sureties. 
This  right  is  known  as  the  right  of  contribution.  As 
has  been  said  before,  a  surety,  if  he  pays  when  he 
is  not  legally  bound  to  do  so,  must  stand  the  loss  him- 
self;  and  the  same  is  true  where  he  is  one  of  several 
co-sureties.  Thus,  if  one  co-surety  pays  a  debt,  which 
is  barred  by  the  statute  of  limitations,  he  would  not, 
in  that  case,  be  entitled  to  contribution  from  his  other 
co-sureties. 

SURETY  COMPANIES.— Surety  companies 
conduct  such  a  large  business  at  the  present  time  that 
a  word  should  be  said  about  them  in  connection  with 


COMMERCIAL   LAW  447 

this  topic.  The  surety  company  is  a  corporation,  and 
its  powers  are,  of  course,  defined  by  its  charter,  and 
the  laws  of  the  State  in  which  it  is  incorporated.  In 
general,  surety  companies  are  authorized  to  guarantee 
performance  of  contracts  and  to  execute  bonds  and 
undertakings  required  by  the  courts.  One  tendency 
is  noticeable  in  recent  years.  The  kind  of  suretyship, 
we  have  been  referring  to,  is  generally  that  in  which 
the  surety  is  an  individual,  who  undertakes  his 
task  for  no  consideration,  and  for  that  reason,  as  we 
have  said,  the  courts  construe  the  contract  of  surety- 
ship strictly  in  favor  of  the  surety.  More  and  more, 
now,  the  practice  of  the  individual  becoming  a  surety 
is  decreasing,  and  in  his  place  the  surety  companies 
offer  their  services  in  a  more  satisfactory  manner,  un- 
der modern  business  conditions,  but  with  the  striking 
difference,  that  the  surety  company  offers  its  services 
only  for  pay,  which  will  net  the  company  a  profit. 
Hence,  the  rule  that  the  contract  should  be  construed 
strictly  in  favor  of  the  surety  does  not  fit  the  case  of 
the  surety  company  which  is  paid  for  its  services.  In 
the  case  of  the  American  Surety  Co.  v.  Paulu,  170  U.S. 
133,  and  in  many  other  cases,  the  rule  is  laid  down, 
that  the  contract  will  be  construed  against  the  surety 
company  and  in  favor  of  the  indemnity  which  the 
obligee  has  reasonable  grounds  to  expect.  So,  it  has 
been  held  that  a  surety  company  will  not  be  relieved 
on  its  contract,  by  an  extension  of  time  to  the  prin- 
cipal, and  that  there  is  no  presumption  that  the  surety 
was  injured  by  the  extension  unless  the  injury  is 
actually  proved. 


448  COMMERCIAL   LAW 

PATENTS.  —  The  policy  of  encouraging  mo- 
nopolies, while  generally  frowned  upon,  finds  two  ex- 
ceptions in  the  law  of  patents  and  copyrights.  Con- 
sequently, the  Federal  Constitution  gives  the  exclu- 
sive right  to  Congress  to  "promote  the  progress  of 
science  and  useful  arts  by  securing  for  limited  times, 
to  authors  and  inventors,  the  exclusive  right  to  their 
respective  writings  and  discoveries."  The  patent  of- 
fice is  located  in  Washington,  and  here  the  Commis- 
sioner of  Patents  has  his  official  office,  and  applica- 
tions for  all  patents  are  made  through  him,  and  he 
is  authorized  to  establish  regulations  for  the  grant- 
ing and  issuance  of  patents.  The  duration  of  a  pat- 
ent right  depends,  of  course,  upon  the  statute.  At 
the  present  time,  the  period  is  seventeen  years,  and  at 
the  end  of  that  time,  the  person  holding  the  patent 
must  yield  up  his  monopoly  and  all  that  pertains  to  it. 
A  patent  is  in  the  nature  of  a  contract,  and  the  United 
States  Supreme  Court  has  said  "The  true  rule  of  con- 
struction in  respect  to  patents  and  specifications,  and 
the  doings  generally  of  inventors,  is  to  apply  plain 
and  ordinary  principles  to  them,  as  we  have  endeav- 
ored to  on  this  occasion,  and  not,  in  this  most  meta- 
physical branch  of  modern  law,  to  yield  up  to  subtle- 
ties and  technicalities,  unsuited  to  the  subject,  and 
not  in  keeping  with  the  liberal  spirit  of  the  age,  and 
likely  to  prove  ruinous  to  a  class  of  the  community 
so  inconsiderate  and  unskilled  in  business  as  men  of 
genius  and  inventors  usually  are."  A  distinction  is 
usually  made  between  pioneer  patents,  and  patents 
which  are  merely  improvements  on  one  already  is- 


COMMERCIAL   LAW  449 

sued.  The  former  are  always  given  a  liberal  in- 
terpretation, while  the  latter  should  be  strictly  con- 
strued. 

ELEMENT  OF  NOVELTY.— It  is  the  element 
of  novelty  which  gives  rise  to  the  right  to  a  patent. 
It  is  not  possible  to  discuss  in  this  limited  space,  the 
countless  decisions  upon  this  point.  A  thing  may 
be  novel  and  entitled  to  a  patent,  although  very  old. 
Some  lost  art  of  the  Egyptians  is  re-discovered  by 
an  American.  Although  the  idea  is  several  thousand 
years  old,  to  all  practical  purposes  it  is  new,  and  the 
inventor  would  be  entitled  to  a  patent.  Like  any 
other  property,  an  inventor's  right  may  be  lost  by 
abandonment..  Thus,  where  an  inventor  taught  a 
large  number  of  people,  with  no  suggestion  that  the 
thing  was  an  experiment,  and  received  pay  for  his 
instruction,  the  court  held  that  this  constituted  an 
abandonment  of  his  claim,  and  he  was  not  entitled 
to  a  patent. 

INFRINGEMENTS.— A  suit  may  be  main- 
tained by  the  owner  of  a  patent  against  one  who  in- 
fringes, and  as  this  is  a  matter  under  the  United 
States  laws,  all  patent  suits  are  tried  in  the  Federal 
courts.  A  patent  right  is  personal  property,  and  upon 
the  death  of  the  owner,  goes  to  his  personal  repre- 
sentative. Patent  rights,  like  other  personal  property, 
may  be  assigned  and  sold. 

SALE  OF  PATENTED  ARTICLES.— In  re- 
cent years,  many  cases  have  arisen  over  the  question 
whether  the  manufacturers  of  patented  articles  are  en- 
titled to  impose  conditions  respecting  the  use  of  their 


450  COMMERCIAL    LAW 

manufactured  articles  by  purchasers.  Early  cases 
seem  to  support  the  view  that,  as  the  theory  of  a  patent 
was  that  of  a  monopoly,  these  conditions  would  be 
upheld  even  after  the  patented  articles  came  into  the 
hands^of  a  purchaser.  Decisions  of  the  United  States 
Supreme  Court,  however,  have  tended  the  other  way. 
So,  attaching  a  notice  to  a  patented  article,  stating 
that  the  article  is  licensed  for  sale  and  use  at  a  speci- 
fied price,  and  that  the  purchase  is  an  acceptance  of 
these  conditions,  and  that  in  the  case  of  a  violation 
of  this  restriction,  all  rights  revert  back  to  the  paten- 
tee, cannot  convert  an  otherwise  apparently  unquali- 
fied sale  into  a  mere  license  to  use  the  invention.  In 
Bauer  v.  O'Donnell,  229  U.  S.  1,  the  Supreme  Court 
said:  "The  right  to  vend  conferred  by  the  patent 
law  has  been  exercised,  and  the  added  restriction  is 
beyond  the  protection  and  purpose  of  the  act.  This 
being  so,  the  case  is  brought  within  that  line  of  cases 
in  which  this  court,  from  the  beginning,  has  held 
that  a  patentee,  who  has  parted  with  a  patented  ma- 
chine, by  passing  title  to  a  purchaser,  has  placed  the 
article  beyond  the  limits  of  the  monopoly  secured 
by  the  patent  act." 

COPYRIGHTS.— A  copyright  is  the  exclusive 
privilege  of  printing,  or  otherwise  multiplying,  pub- 
lishing and  selling  copies  of  literary  or  artistic  pro- 
ductions. The  nature  of  a  copyright  is  thus  defined 
by  the  United  States  Supreme  Court,  in  the  case 
of  Caliga  v.  Newspaper  Co.,  215  U.  S.  158:  "Stat- 
utory copyright  is  not  to  be  confounded  with  the 
common  law  right.     At  common  law,  the  exclusive 


COMMERCIAL    LAW  451 

right  to  copy  existed  in  the  author  until  he  permitted 
a  general  publication.  Thus,  when  a  book  was  pub- 
lished in  print,  the  owner's  common  law  right  was 
lost.  At  common  law,  an  author  had  a  property  in 
his  manuscript,  and  might  have  an  action  against 
any  one  who  undertook  to  publish  it  without  author- 
ity. The  statute  created  a  new  property  right,  giv- 
ing to  the  author,  after  publication,  the  exclusive 
right  to  multiply  copies  for  a  limited  period.  This 
statutory  right  is  obtained  in  a  certain  way,  and  by 
the  performance  of  certain  acts  which  the  statute 
points  out.  That  is,  the  author  having  complied  with 
the  statute,  and  given  up  his  common  law  right  of 
exclusive  duplication,  prior  to  general  publication,  ob- 
tained by  the  method  pointed  out  in  the  statute  an 
exclusive  right  to  multiply  copies  and  publish  the 
same  for  the  term  of  years  named  in  the  statute.  Con- 
gress did  not  sanction  an  existing  right;  it  created  a 
new  one." 

PROPERTY  RIGHT  IN  IDEAS.— The  doc- 
trine that  a  person  has  a  property  right  in  his  ideas 
has  never  been  recognized,  either  by  common  law 
or  by  statute.  To  illustrate:  If  A,  in  the  course  of 
a  conversation  with  B,  gives  his  idea  of  what  would 
be  a  brilliant  thought  to  work  up  into  a  detective 
story,  and  B,  possessing  some  literary  ability,  takes 
the  idea  and  writes  a  successful  detective  story,  he  is 
entitled  to  the  profits  secured  from  the  sale  of  the 
book,  and  there  is  nothing  that  A  can  do  about  it. 
The  idea  which  A  handed  to  B  has  been  put  by  B 
into  such  form  that  it  is  practicable  to  allow  B  to 


452  COMMERCIAL   LAW 

copyright  it,  and  protect  his  property  right  in  the 
story.  There  is  no  practical  way  to  protect  a  mere 
idea. 

EFFECT  OF  COPYRIGHT  STATUTES.— 
One  must  bear  in  mind  the  effect  of  copyright  stat- 
utes on  common  law  rights.  At  common  law,  an 
author  has  a  property  in  his  manuscript,  and  may 
obtain  redress  for  any  attempt  to  deprive  him  of  it, 
and  the  copyright  act  provides  that  nothing  in  the 
act  shall  limit  the  right  of  the  author,  at  common 
law,  or  in  equity,  to  prevent  the  copying,  publication 
or  use  of  an  unpublished  work,  without  his  consent 
and  it  gives  him  the  right  to  damages  should  this 
be  done.  At  common  law,  the  author  of  any  literary 
composition  had  an  absolute  property  right  in  his 
production,  and  he  could  not  be  deprived  of  it  so 
long  as  it  remained  unpublished.  Interesting  ques- 
tions have  arisen  in  regard  to  the  nature  of  the  prop- 
erty rights  in  letters.  The  question  as  to  the  rights 
of  the  sender  and  the  recipient  are  frequently  trou- 
blesome. The  rights  of  the  writer  consist  in  the  pow- 
er to  make  or  restrain  a  publication  by  the  recipient, 
but  he  cannot  prevent  a  transfer.  The  rights  of  the 
recipient  are  those  of  unqualified  title  in  the  material 
on  which  they  are  written.  He  has  the  right  to  keep 
them,  to  read  them,  and  show  them  to  a  limited 
circle  of  friends,  somewhat  in  the  same  way  as  a 
family  picture  album  might  be  used. 

PROPERTY  RIGHT  IN  INFORMATION 
OR  NEWS. — Another  interesting  question  is  as  to 
whether  there  can  be  any  property  right  in  informa- 


COMMERCIAL   LAW  453 

tion  or  news  which  has  been  collected  at  great  ex- 
pense by  the  Associated  Press  or  some  similar  organ- 
ization. The  most  important  case  on  this  question 
is  that  of  the  Internationl  News  Co.  v.  the  Associated 
Press,  248  U.  S.  215.  The  Associated  Press,  organ- 
ized in  New  York,  is  a  corporation  created  for  the 
purpose  of  collecting  news  and  distributing  it  to 
about  950  newspapers  at  an  annual  expense  of  about 
$3,500,000.  The  International  News  Service  was  a 
corporation  organized  in  New  Jersey  to  collect  and 
sell  news  to  a  chain  of  newspapers.  The  complaint 
was  made  by  the  Associated  Press  that  the  Interna- 
tional News  Service  was  engaged  in  pirating  its  news 
in  three  ways:  (1)  By  bribing  employees  of  news- 
papers, published  by  complainant's  members,  to  fur- 
nish Associated  Press  news  to  defendant,  before  pub- 
lication, for  transmission  by  telegraph  and  telephone 
to  defendant's  clients,  for  publication  by  them;  sec- 
ond, by  inducing  Associated  Press  members  to  violate 
its  by-laws  and  permit  defendant  to  obtain  news  be- 
fore publication ;  and,  third,  copying  news  from  early 
editions  of  complainant's  newspapers,  and  selling  it, 
either  bodily  or  after  rewriting  it,  to  defendant's  cus- 
tomers." The  court  held  that  news  should  be  re- 
garded as  quasi-property,  and  that  it  was  unfair  com- 
petition in  business  for  the  International  News  Ser- 
vice to  take  from  newspapers,  which  are  members 
of  the  Associated  Press,  news  furnished  by  it,  and  re- 
fused to  modify  the  injunction  issued  by  the  District 
Court  restraining  any  taking  or  using  of  the  Asso- 
ciated Press  news,  either  bodily  or  in  substance,  from 


454  COMMERCIAL    LAW 

bulletins  issued  by  the  Associated  Press,  or  any  of 
its  members,  or  from  editions  of  its  newspapers, 
until  its  commercial  value  to  the  complainant  and  all 
of  its  members  had  passed  away. 

APPLICATION  FOR  COPYRIGHT.— The 
formality  of  securing  a  copyright  is  comparatively 
simple.  The  register  of  copyrights,  in  the  library  of 
Congress  at  Washington,  furnishes  a  blank  which 
the  applicant  fills  out  and  returns,  giving  the  required 
information,  and  on  or  before  the  first  day  of  pub- 
lication, the  applicant  must  send  two  copies  of  the 
copyrighted  book  to  the  library  of  Congress.  The 
copyright  is  good  for  twenty-eight  years,  v/ith  a  right 
to  renewal.  The  works  for  which  copyrights  may  be 
secured  may  be  classified  as:  (a)  Books,  including 
composite  and  cyclopedic  books,  directories,  gazet- 
teers, and  other  compilations;  (b)  periodicals,  includ- 
ing newspapers ;  (c)  lectures,  sermons,  and  addresses, 
prepared  for  oral  delivery;  (d)  dramatic  or  dramatic- 
musical  compositions;  (e)  musical  compositions;  (f) 
maps;  (g)  works  of  art,  models  or  designs  for  works 
of  art;  (h)  reproductions  of  a  work  of  art;  (i)  draw- 
ings or  plastic  works  of  scientific  or  technical  char- 
acter; (j)  photographs;  (k)  prints  and  pictorial  rec- 
ords. There  are  certain  things,  which,  while  techni- 
cally they  are  under  the  classification  we  have  given, 
are  not  subject  of  copyright.  The  opinions  handed 
down  by  the  judges  of  all  of  our  courts,  although 
they  are  in  the  form  which  would  ordinarily  permit 
copyright,  are  not  subject  of  copyright  because  of  the 
general  principle  of  law  that  a  judge  receives  a  stated 


COMMERCIAL    LAW  455 

annual  salary  and  cannot,  therefore,  have  any  pecun- 
iary interests  in  the  fruits  of  his  judicial  labors.  This 
does  not  mean,  however,  that  the  opinions  of  the 
United  States  Supreme  Court,  for  example,  are  not  to 
be  found  in  a  copyrighted  book.  The  Supreme  Court 
Reporter,  which  is  one  of  the  systems  of  reporters 
published  by  the  West  Publishing  Co.  as  a  purely 
comm.ercial  enterprise,  is  copyrighted  by  that  com- 
pany. This  is  because  of  the  fact  that  the  editorial 
staff  of  the  West  Publishing  Co.  prepares  a  syllabus 
for  each  opinion,  an  exhaustive  index  in  each  volume, 
and  a  table  of  cases,  and  all  of  this  matter  arranged 
by  that  company,  is  subject  to  copyright,  and  they 
have  the  right  to  use  the  opinions  of  the  Supreme 
Court  the  same  as  any  other  publisher  would  have. 
Again,  a  copyright  might  be  refused  on  the  grounds 
that  the  book  on  which  the  copyright  was  sought 
was  an  immoral  or  obscene  writing,  and  therefore  not 
entitled  to  protection  of  the  copyright  law.  The  word 
"Copyrighted"  accompanied  by  the  name  of  the  copy- 
right proprietor  should  appear  on  the  page  opposite 
the  title  page,  or  if  the  article  copyrighted  is  a  pic- 
ture, the  act  provides  that  the  device,  accompanied 
by  the  initials  or  the  symbol  of  the  copyright  proprie- 
tor, shall  appear  on  the  article. 

SUBJECTS  OF  COPYRIGHT.— In  the  classi- 
fication we  have  just  given,  mention  is  made  of  lec- 
tures, sermons,  etc.,  as  being  the  subject  of  copyright. 
It  is  held,  however,  that  a  lecture,  delivered  orally  to 
a  class  of  students,  is  not  published  to  the  extent  that 
the  instructor  loses  his  right  to  it,  although  the  stu- 


456  COMMERCIAL    LAW 

dents  may  be  allowed  to  make  notes  for  their  own 
use.  In  the  same  way,  the  artist  does  not  lose  his 
common  law  copyright  by  an  exhibition  of  his  pic- 
tures in  his  studio  or  in  a  public  gallery  where  they 
are  placed  for  sale.  Similarly  the  public  presentation 
of  a  dramatic  production  does  not  deprive  the  owner 
of  his  rights  in  it.  The  reason  for  this  is  that  at 
common  law  the  public  performance  of  a  play  does 
not  mean  an  abandonment  to  the  public  generally. 

TRADE  MARKS  AND  TRADE  NAMES.— A 
trade  mark  or  trade  name  is  a  mark  or  symbol  which 
the  tradesman  puts  upon  his  goods,  so  that  they  may 
be  identified  and  known  by  the  public  generally.  A 
trade  name  differs  from  a  trade  mark  in  that  it  is  de- 
scriptive of  the  manufacturer  himself,  and  involves  the 
individuality  of  the  maker.  Statutes  will  be  found 
covering  the  registration  of  trade  marks  and  trade 
names,  but  the  protection  which  the  law  affords  the 
owner  of  these  is  not  confined  to  a  statute  alone.  It 
is  generally  held  that  a  trade  mark,  subject  to  some 
qualifications,  arises  without  the  aid  of  any  statute. 

SUBJECT  MATTER  OF  TRADE  MARK  OR 
TRADE  NAME.— The  question  as  to  what  is  the 
subject-matter  of  a  trade  mark  or  a  trade  name,  can 
only  be  determined  by  a  careful  reading  of  the  cases. 
A  trade  mark  may  consist  of  a  name,  a  symbol,  a  let- 
ter, some  arbitrary  form,  or  a  newly-coined  word. 
Pictures  of  animals,  coats  of  arms,  and  the  like,  are 
frequently  used.  No  trade  mark  can  be  obtained  by 
the  mere  use  of  a  color  or  generally  a  geographical 
term,  nor  can  a  trade  mark  be  obtained  from  the  form 


COMMERCIAL   LAW  457 

of  a  package  in  which  goods  are  packed,  and  gener- 
ally, mere  letters  and  numbers  cannot  form  a  trade 
mark,  although  the  arbitrary  combination  of  num- 
bers, such  as  "Babbitt's  1776"  may  be  a  valid  trade 
mark. 

NAMES  NOT  VALID  TRADE  MARKS.— 
Generic  names,  and  merely  names  of  articles,  are  not 
valid  trade  marks,  as  "Extract  of  Wheat,"  and  "New 
York  Cough  Remedy."  A  trade  name  of  a  firm,  a 
corporate  name,  or  the  name  of  a  publication,  al- 
though they  are  not  strictly  trade  marks,  are,  never- 
theless, of  the  same  nature  as  a  trade  mark,  and  will 
be  protected  in  the  same  manner. 

UNFAIR  COMPETITION.— The  most  com- 
mon way  in  which  trade  marks  and  trade  names  be- 
come the  subject  of  litigation,  is  in  connection  with 
unfair  competition.  By  this  term  we  mean,  ordinarily, 
the  imitation  by  one  person,  for  the  purpose  of  de- 
ceiving another,  of  the  name,  device,  or  symbol  used 
by  a  business  rival.  The  courts  act  in  such  cases 
upon  the  theory  that  the  public  should  be  protected, 
and  should  not  have  other  goods  pawned  off  on  it 
in  place  of  something  else  which  a  person  thinks  he 
is  getting.  This  matter  of  unfair  competition  is  the 
subject  of  much  litigation  in  the  courts,  and  one  or 
two  illustrations  will  show  how  the  question  arises. 
For  example:  In  an  English  case,  decided  in  1897,  the 
plaintiff  had  manufactured  and  sold  a  relish  which 
was  made  under  a  secret  recipe  and  was  sold  under 
the  name  "Yorkshire  Relish."  The  defendant  then 
put  a  sauce  on  the  market  resembling  it,  and  sold  it 


458  COMMERCIAL    LAW 

under  the  name  of  "Yorkshire  Sauce."  The  court 
held  that  the  plaintiff  was  entitled  to  an  injunction. 
In  the  case  of  the  International  Silver  Co.  v.  the  Rog- 
ers Co.,  66  N.  J.  Equity  119,  the  court  enjoined  the  use 
of  the  word  "Rogers"  in  the  corporate  title  of  the 
William  H.  Rogers  Corporation,  on  the  ground  that 
its  use  was  a  part  of  the  proceedings  by  which  the 
public  were  deceived.  In  this  case  a  manufacturer 
of  silverware,  in  Plainfield,  N.  J.,  was  attempting  to 
trade  upon  the  reputation  of  the  "1847"  brand  of  plat- 
ed silver  made  by  the  Rogers  Company  of  Connecti- 
cut, which  company  was  at  the  time  of  the  action, 
a  constituent  part  of  the  International  Silver  Co. 
The  Connecticut  Company  had  built  up  a  large  and 
good  reputation  by  a  long  period  of  sales  of  its  silver- 
ware to  the  public  under  its  trade  devices,  and  the 
use  of  its  business  name.  The  New  Jersey  Company 
was  simply  attempting  to  trade  on  that  reputation, 
which  is  almost  always  the  case  in  unfair  competi- 
tion. 

CONFLICT  OF  LAW.— Although  we  have  re- 
ferred to  the  uniform  legislation  in  the  various  topics 
of  commercial  law  which  we  have  been  considering, 
there  is  still  much  in  the  subject  of  conflict  of  law 
which  concerns  the  student  of  commercial  law.  In- 
ternational law  is  commonly  divided  into  two 
branches,  public  and  private.  Public  is  that  which 
regulates  the  political  intercourse  of  nations  with 
each  other;  private,  that  which  regulates  the  comity 
of  States  in  giving  effect  in  one  to  the  municipal  laws 
of  another  relating  to  private  persons.     Conflict  of 


COMMERCIAL    LAW  459 

law  is  one  division  of  the  broader  subject  of  interna- 
tional law  and  is  frequently  called  private  interna- 
tional law.  In  the  sense  in  which  we  are  now  using 
the  term,  the  various  States  of  the  Union  are  consid- 
ered as  foreign  to  each  other.  The  problems  embraced 
in  this  topic  and  their  bearing  on  commercial  law  may 
be  more  fully  appreciated  if  we  take  a  simple  illustra- 
tion. A  stock  broker  with  offices  in  New  York  City 
seeks  to  sell  the  stock  of  a  new  oil  mining  company 
to  a  purchaser  in  Indiana..  The  sale  is  one  v/hich  is 
not  allowed  by  the  Indiana  "blue  sky"  law.  New 
York  has  no  such  law.  The  sale  is  effected  by 
means  of  circulars  and  correspondence  between 
the  New  York  broker  and  the  Indiana  purchaser. 
Is  this  transaction  to  be  governed  by  the  law  of 
Indiana  or  of  New  York?  Its  validity  will  de- 
pend upon  our  answer  to  that  question  and  this 
is  the  type  of  question  one  has  to  answer  on  the 
subject  of  conflict  of  law.  With  approximately  forty 
different  "blue  sky"  laws  in  the  country  at  present, 
and  the  great  number  of  stock  transactions  carried 
on  between  the  States,  the  importance  of  this  topic 
may  be  appreciated.  Again,  even  where  we  have  a 
uniform  act  as,  for  example,  the  Uniform  Negotiable 
Instruments  Act,  there  are  still  differences  in  the  law 
in  some  States.  Each  statute  must  be  interpreted  by 
the  courts,  and  although  the  judges  are  sincere  in 
their  efforts,  it  can  not  be  expected  that  we  will  al- 
ways have  a  uniform  interpretation  of  the  same  act 
by  the  courts  in  each  and  every  jurisdiction  of  the 
United  States. 


460  COMMERCIAL   LAW 

FUNDAMENTAL  PRINCIPLES.— There  are 
several  fundamental  principles  we  should  keep  in 
mind  before  we  turn  to  the  specific  branches  of  com- 
mercial law  as  affected  by  our  topic.  The  term  comity 
is  one  of  common  use  in  conflict  of  law  and  is  defined 
as  the  recognition  which  one  nation  or  State  allows 
within  its  territory  to  the  legislative,  executive,  or 
judicial  acts  of  another  nation  or  state.  Comity  is  not 
a  matter  of  right,  but  a  courtesy,  and  one  country  may 
exercise  its  right  and  prohibit  citizens  of  other  coun- 
tries from  suing  in  its  courts.  Of  course  the  various 
States  of  the  United  States  are  not  as  completely  free 
in  this  matter  as  separate  countries,  because  of  the 
provision  in  the  Federal  Constitution  guaranteeing 
to  the  citizens  of  each  State  all  the  privileges  and  im- 
munities of  citizens  in  the  several  States.  There  are 
still  many  questions  which  are  not  affected  by  the 
Federal  Constitution.  For  example,  a  suit  is  brought 
in  New  Jersey  upon  a  contract  of  suretyship  made  in 
New  York  by  a  wife  for  her  husband.  There  is  a 
statute  in  New  Jersey  prohibiting  a  married  woman 
from  doing  this.  New  York  has  no  such  statute. 
Shall  the  New  Jersey  court  enforce  the  contract  which 
the  parties  made  in  New  York  but  which  they  could 
not  have  made  in  New  Jersey?  Under  the  principle 
of  comity  a  New  Jersey  court  has  held  valid  such  a 
contract.  Again,  it  is  entirely  conceivable  that  a  per- 
son living  in  Turkey  might  make  a  binding  contract 
to  marry  three  women  at  the  same  time.  Suppose  the 
Turk  before  the  time  for  performing  the  contract  ar- 
rives, comes  to  New  York  and  then  refuses  to  marry 


COMMERCIAL    LAW  461 

the  three  women.  Could  they  sue  him  for  a  breach 
of  contract  in  the  New  York  court?  Clearly  not.  Here 
they  would  be  asking  the  New  York  court  to  enforce 
a  contract  which  while  admittedly  valid,  when  made 
in  Turkey,  is  decidedly  against  the  public  policy  of 
any  monogamous  country.  Comity  being  a  courtesy, 
not  a  right,  would  not  require  a  New  York  court  to 
recognize  the  Turkish  contract.  In  our  illustration 
of  the  wife  acting  as  surety,  no  question  of  public 
policy  was  involved  and  hence  there  was  no  impro- 
priety in  New  Jersey  recognizing  as  valid  her  con- 
tract, although  such  a  contract  could  not  have  been 
made  within  the  State  of  New  Jersey. 

CONFLICT  OF  LAW  AS  RELATING  TO 
THE  STATUS  OF  PROPERTY.— As  we  have 
pointed  out  heretofore,  property  is  divided  into  real 
property  and  personal  property.  Reference  should 
be  made  to  the  distinctions  between  these  two  kinds 
of  property  as  described  in  a  preceding  chapter.  Sup- 
pose A  dies  intestate  in  Texas  owning  real  property 
in  New  York.  The  law  relating  to  the  descent  of  real 
property  is  different  in  Texas  from  that  in  New  York, 
A's  heirs  wish  to  know  by  which  law  this  New  York 
real  estate  will  be  governed.  It  is  almost  universally 
recognized  that  all  matters  concerning  the  title  and 
disposition  of  real  property  are  determined  by  what 
is  known  as  the  lex  loci  rei  sitae,  that  is,  the  law  of 
the  place  where  the  property  is  situated.  Accordingly 
the  heirs  in  Texas  would  be  governed  by  the  law  of 
the  State  of  New  York  and,  similarly,  if  A  had  also 
owned  property  in  Illinois,  that  property  would  be 


462  COMMERCIAL   LAW 

governed  by  the  Illinois  law.  Suppose,  also,  A  had 
owned  $50,000  worth  of  stock  in  various  corporations 
and  he  kept  one-half  of  this  stock  in  his  safe  deposit 
box  in  Galveston  and  the  other  half  in  New  York 
City.  While  the  dominion  of  a  State  over  personal 
property  within  its  borders  is  complete,  nevertheless 
by  virtue  of  the  principles  of  comity,  the  rule  has  been 
recognized  almost  from  time  immemorial  that  per- 
sonal property  is  governed  by  the  law  of  the  domicile 
of  the  decedent  at  the  time  of  his  death.  Hence  A's 
stocks  (and  bonds  for  that  matter)  would  be  divided 
according  to  the  law  of  Texas  whether  they  were  in 
his  safe  deposit  box  in  Galveston,  New  York  City,  or 
Chicago.  It  follows,  when  no  rights  of  creditors  in- 
tervene, that  the  law  of  the  domicile  of  the  testator 
will  control  in  regard  to  his  will  of  personal  property, 
and  the  law  of  the  place  where  the  real  property  is  sit- 
uate will  control  in  regard  to  it. 

CONFLICT  OF  LAW  AS  RELATING  TO 
CONTRACTS. — It  is  a  general  principle  of  contract 
law  that  the  construction  and  validity  of  a  contract 
is  governed  by  the  lex  loci  contractus,  the  law  of  the 
place  where  the  contract  is  made.  When  the  contract 
is  made  in  one  jurisdiction  and  is  to  be  performed  in 
another,  the  question  becomes  more  difficult.  The 
Supreme  Court  of  the  United  States,  in  Scudder  v. 
Union  Nat.  Bank,  91  U.  S.  406,  has  laid  down  the  fol- 
lowing rules  in  reference  to  the  law  governing  con- 
tracts in  cases  in  which  the  place  of  making  and  the 
place  of  performance  are  not  the  same.  "1.  Matters 
bearing  upon  the  execution,  interpretation  and  val- 


COMMERCIAL    LAW  463 

idity  are  determined  by  the  law  of  the  place  where  the 
contract  is  made ;  2.  Matters  connected  with  the  per- 
formance are  regulated  by  the  law  of  the  place  where 
the  contract  by  its  terms  is  to  be  performed;  3.  Mat- 
ters relating  to  procedure  depend  upon  the  law  of  the 
forum  (i.  e.,  the  court  where  the  case  is  heard).  These 
three  general  rules  have  been  adopted  and  applied  by 
many  jurisdictions  in  a  long  line  of  cases  involving 
every  conceivable  kind  of  contract.  But  perhaps  it  is 
even  more  generally  stated,  when  the  contract  is  to  be 
performed  in  a  place  other  than  the  place  where  it  is 
made,  that  the  law  of  the  place  where  the  contract  is 
to  be  performed  will  determine  the  validity,  nature,  ob- 
ligation and  effect  of  the  contract,  or,  in  other  words, 
in  case  of  conflict  the  lex  loci  solutionis  (the  law  of 
the  place  of  performance)  will  prevail  over  the  lex 
loci  contractus.  Although  these  statements  at  first 
seem  somev/hat  contradictory,  we  may  always  apply 
another  rule  which  is  a  sound  test  for  the  determina- 
tion of  the  proper  law  to  be  applied.  We  may  prop- 
erly say  that  the  intention  of  the  parties  should  con- 
trol and  it  is  generally  agreed  that  the  law  of  the 
place  where  the  contract  is  made  is,  prima  facie,  that 
which  the  parties  intended  to  govern  the  contract, 
and  in  the  absence  of  a  contrary  intention  ought  to 
control.  It  frequently  happens  that  a  contract  made 
in  one  State  is  sued  upon  in  the  courts  of  another 
State.  The  law  governing  the  procedure  in  the  trial 
of  this  case  will  be  the  law  of  the  forum,  that  is  of  the 
State  where  the  case  is  tried,  regardless  of  what  the 
law  may  be  on  the  same  matter  in  the  State  where 


464  COMMERCIAL   LAW 

the  contract  was  made.  There  may  be,  for  example, 
a  peculiar  rule  as  to  a  wife's  being  able  to  testify  on 
the  contract  in  question.  This  rule  will  be  enforced 
by  the  court  although  no  such  rule  existed  in  the  State 
where  the  contract  was  made.  There  is  no  great 
hardship  in  the  application  of  such  principles  because 
the  courts  of  the  State  where  the  contract  was  made 
are  open  to  the  parties,  and  if  they  wish  to  avail 
themselves  of  the  services  of  a  court  in  a  different 
jurisdiction  they  must  take  it  as  they  find  it  with  its 
rules  of  procedure. 

ILLUSTRATION.— There  is  another  type  of 
contract  which  involves  the  question  of  conflict  of 
law  to  which  attention  should  be  called.  The  facts 
in  the  case  of  Fonesca  v.  Cunard  Steamship  Company 
153  Mass.  553,  illustrate  this  point.  A  passenger  on 
one  of  the  steamships  of  the  Cunard  Steamship  Com- 
pany bought  a  ticket  in  Liverpool  for  Boston  and  on 
the  ticket  was  a  clause  providing  that  the  steamship 
company  should  not  be  liable  for  any  damage  to  a  pas- 
senger's baggage  during  transit,  regardless  of 
whether  the  steamship  company  was  negligent  in 
handling  the  baggage.  When  the  passenger  arrived 
in  Boston,  and  her  trunk  was  delivered,  it  was  found 
that  the  contents  had  been  damaged  by  sea  water  due 
to  the  steamboat  company  negligently  leaving  a  port- 
hole open.  The  passenger  sued,  and  the  Massachu- 
setts court  held  there  could  be  no  recovery  for  the 
damage,  for,  although  such  a  clause  exempting  a  car- 
rier for  his  negligence  was  not  valid  under  the  Massa- 
chusetts law  (and  in  fact  the  law  of  practically  all 


COMMERCIAL    LAW  465 

American  jurisdictions),  nevertheless,  since  the  law 
of  England  permits  such  a  clause,  and  this  was  an 
English  contract,  the  ticket  having  been  bought  in 
Liverpool,  the  passenger  was  bound  by  the  terms 
of  her  contract.  There  are  many  kinds  of  con- 
tracts of  transportation  of  baggage,  of  passengers 
and  of  telegraph  messages,  involving  the  carrying  out 
of  such  contracts  in  many  different  States.  Not  all 
of  the  decisions  in  the  various  States  of  this  country 
are  harmonious.  We  must  expect  to  find  many  such 
problems  in  business  and  the  answer  is  often  one  that 
requires  most  careful  study  on  the  part  of  a  lawyer. 

CONFLICT  OF  LAW  AS  RELATING  TO 
NEGOTIABLE  PAPER.— There  is  not  so  large  a 
field  for  questions  of  conflict  of  law  to  come  up  in 
negotiable  paper  as  in  some  of  the  other  topics  we 
have  been  considering.  Forty-seven  States  have  now 
passed  the  Uniform  Negotiable  Instrument  Law.  But, 
as  we  have  pointed  out,  the  interpretation  of  this  law 
in  the  various  States  is  not  invariably  uniform.  Sup- 
pose a  promissory  note  has  six  indorsers.  Every  in- 
dorsement is  governed  by  the  law  of  the  State  where 
it  was  made,  and  should  there  be  a  different  law  in  this 
matter,  we  would  at  once  have  a  question  in  conflict 
of  law.  Again,  in  determining  the  negotiability  of  a 
document  made  in  one  place  and  payable  in  another, 
we  have  a  further  question  in  conflict  of  law.  The 
authorities  do  not  agree  here  although  perhaps  we 
may  say  the  majority  hold  that  the  law  of  place  or 
payment  controls.  These  problems  will  be  considered 
in  the  text-book  on  Negotiable  Instruments. 


466  COMMERCIAL    LAW 

CONFLICT  OF  LAW  AS  RELATING  TO 
INTEREST  AND  USURY.— We  find  a  variety  of 
usury  laws  throughout  the  United  States.  Some  few 
States  allow  the  lender  to  charge  any  rate  of  interest. 
Others  allow  a  fixed  rate,  usually  6%,  and  provide 
that  the  lender  forfeits  both  principal  and  interest  if 
he  charges  more.  Still  others  allow  a  fixed  rate  and 
provide  that  interest  only  is  forfeited  if  a  higher  rate 
is  charged.  It  is  easy  to  see  that  a  contract  made  in 
one  State  may  be  sued  upon  in  another  State  and  the 
usury  laws  of  the  two  States  may  be  entirely  differ- 
ent. We  may  say  as  a  general  rule  that  usury  laws  do 
not  offend  any  principles  of  public  policy.  There  is 
nothing  wrong  in  asking  a  New  York  court,  where 
the  legal  rate  of  interest  is  6%,  to  enforce  a  contract 
made  in  a  State  where  a  higher  rate  is  allowed.  On 
the  other  hand,  no  New  York  court  would  allow  citi- 
zens of  New  York  simply  to  date  a  contract  Boston, 
Massachusetts,  and  provide  for  a  10%  interest  rate, 
thereby  hoping  to  evade  the  New  York  Usury  law, 
when,  except  for  the  date  on  the  contract,  it  was  in 
reality  wholly  a  New  York  contract. 


I 


INDEX 


Page 

Acceptance 32 

Accommodation  Bills 357 

Accounting  133 

Adequacy  of  Consideration 57 

Administrators   68,  340 

Advertisements   36 

Agency 122,  141 

Agency,  Irrevocable 148 

Airplanes 12 

Alteration 72 

Alteration  of  Written  Contracts 113 

Aliens  77,  84 

Analysis  of  Indenture 219 

Anti-Trust  Act 206 

Architect's  Certificate  87 

Articles  of  Partnership 175 

Assault  and  Battery 408 

Assets,  Division  of 186 

Assets  of  Partnership 186 

Assignment  of  Duties 107 

Assignment  of  Future  Claims 110 

Assignment  of  Rights 106 

Assignments  105 

Assignments,  Forged 242 

Assignments,  General 425,  430 

Assignments,  Meaning  of 105 

Assignments,  Partial 109 

Assignments  by  Unauthorized  Agent 243 

Assumption  of  Mortgage 314 

Attachment 369,  374 

Attachment  of  Stock 248 

Attorney,  Powers  of 105,  125 

Auction  Sales 39 

467 


468  COMMERCIAL   LAW 

Page 

Authority  of  Agent 132 

Avoidance 81 

Bailment 262 

Bank  Accounting 228 

Bank  Officers,  Liability  of 226 

Bank  President 227 

Bankruptcy 66,  95,  247,  428 

Bankruptcy,  Composition  in 437 

Barred  Debts 64,  65 

Beneficiary   75 

Bids   40 

Bilateral  Contracts 26,  108 

Bills  and  Notes 378 

Bills  of  Exchange 392 

Bills  of  Lading 270,  347 

Blue  Sky  Laws 229 

Bonds 216,  217 

Breach  of  Contract 92 

Breach  of  Warranty 281 

Building  Contracts 87 

Burglary 422 

Capacity,  Lack  of 244 

Capacity  of  Parties 74,  77,  264 

Carriers 267,  344 

Certificate  of  Architect 88 

Certificates,  Forged  241 

Certificates,  Unindorsed 256 

Certificates,  Lost 255 

Chattels  291 

Chattels,  Leases  of 291 

Chattel  Mortgage 291 

Checks    112,  382 

Claim,  Liquidated  59,  1 12 

Claim,  Proof  of 434 

Claim,  Unliquidated 112 

C.  O.  D 270 


COMMERCIAL   LAW  469 

Page 

Commercial  Law 7 

Common  Carriers 344 

Common  Law 9 

Competition,  Unfair 457 

Composition  in  Bankruptcy 437 

Composition  with  Creditors 425 

Conditional  Contracts  86 

Conditional  Promise 35 

Conditional  Sales 289 

Conflict  of  Laws 336,  458 

Consideration 57,  390 

Consignments 290 

Construction  of  Wills 334 

Contract,  Agency  by 125 

Contract  to  Sell 261 

Contracts 24,  299,  462 

Contracts : 

Bilateral 26,  108 

Breach  of  92 

Building 87 

By  Correspondence   48 

By  Mail   48 

Definition  of 24 

Discharge  of 110 

Drafting    114 

Enforceability    57 

Formal    25 

Gambling    102 

Illegal    101 

Implied   41 

Informal    25 

In  Restraint  of  Trade 101 

Installment    91 

Liquidated 58,  59 

Of  Employment  88 

Performance    86 


470  COMMERCIAL   LAW 

Page 

Quasi    115 

Sealed    27 

Simple   29 

To  Sell 261 

Termination  86 

Unenforceable    26 

Unilateral    26 

Unliquidated 59 

Void : 25,  81 

Voidable 26,  66,  78,  81 

Written 38,  72,  113 

Contractors 161 

Contribution  446 

Contributory  Negligence 416 

Conveyances,  Fraudulent 429 

Copyright   450 

Corporations 85,  86,  192 

By-Laws   207 

Citizenship  of 196 

Creation  of 194 

De  Facto 201 

De  Jure 201 

Directors 212 

Foreign    209 

Indenture  217 

Joint  Stock 168 

Kinds  of  194 

Liability  of 205 

Liability  of  Directors 224 

Liability  of  Officers 224 

Management  of 210 

Powers  of  197,  221 

Stockholders    208 

Correspondence,  Contracts  by 48 

Counter  Offer 43 

Courts 20,  21 


COMMERCIAL    LAW  471 

Page 

Creation  of  Corporations   194 

Creditors'  Rights   186 

Criminal  Law 205,  405,  419 

Cumulative  Dividends  223 

Cumulative   Voting    213 

Curtesy    300,    336 

Death   44,  375 

Debts    64,  65 

Deceit    412 

Deeds  of  Trust  317 

De  Facto  Corporation  201 

Default  301 

Defective  Goods   282 

Definition  of  Agency 122 

Definition  of  Contracts  24 

Definition  of  Law   7 

Definition  of  Partnership   164 

De  Jure  Corporation   201 

Delectus  Personarum    173 

Delivery  272,  388 

Delivery,  Lack  of  244 

Destruction  of  Goods  in  Transit 362 

Directors    212,  221 

Directors,  Election  of 212 

Directors,   Liability  of    224 

Directors,  Powers  of 197,  221 

Disability    124 

Discharge  of  Contracts 110 

Dividends   222 

Divine  Law    7 

Division  of  Assets   186 

Dower 300,  335 

Drafting   Contracts    114 

Drafts    381 

Drunkards  77,  79,  82 

Due  Course,  Holders  in  383,  396 


472  COMMERCIAL   LAW 

Page 

Duress  99 

Duties,  Assignment  of 107 

Easements 14 

Employment  Contracts 88 

Enforceability  of  Contracts 57 

Equitable  Title 284 

Equity  of  Redemption 308 

Entity  Theory 193 

Estates  and  Trusts 321 

Escheat 319 

Estoppel 128,  130 

Executors 68,  254,  340 

Fact,  Mistakes  of 100,  116 

False  Imprisonment 414 

Fidelity   133 

Fiduciary  Duties 104 

Firm  Name 176 

Firm  Property 186 

Forbearance 63 

Foreclosure 316 

Foreign  Corporations 209 

Forged  Assignments 242 

Forged  Certificates 241 

Forgery 367,  423 

Formal  Contracts 25 

Forms: 

Check 382 

Draft   381 

Promissory  Note 379 

Will    328 

Fraud 96,  97,  98,  99,  412 

Frauds,  Statute  of 67 

Fraudulent  Conveyances 429 

Fraudulent  Sales 285 

Full  Payment 112 

Future  Claims  110 


COMMERCIAL    LAW  473 

Page 

Gambling  Contracts 102 

Garnishment 373 

General  Agents 141 

General  Assignments 425,  430 

Gifts 261,  293,  324,  376 

Good  Will 178 

Guarantee 36,  68,  440 

Guaranty  (see  Guarantee). 

Holder  in  Due  Course 383,  396 

Homicide 421 

Husband  and  Wife 249 

Illegal  Contracts 101 

Illegal  Object   172 

Illegality   104 

Implied  Authority  137 

Implied  Contracts    41 

Implied  Warranty  277 

Impossibility    100 

Imprisonment,  False   414 

Inability    94 

Incapacity 244 

Indentures 219 

Independent  Contractors  161 

Indorsement,  Qualified  399 

Indorser 398 

Infancy    66 

Infants 11,  20,  26,  66,  77,  78,  79 

Informal  Contracts 25 

Inheritance  Tax  Laws 377 

Insane    80 

Insanity 44,  77,  79 

Insolvency    95 

Insolvent  Debtors 425 

Inspection  273,  278 

Installment  Contracts  91 

Insurance 86,  438 


474  COMMERCIAL    LAW 

Page 

Insurance  Policy 36 

Intent 30 

Interest    466 

Interpleader   256 

Interpretation    155 

Irrevocable  Agencies 148 

Issue  of  Stock  215 

Joint  Stock  Corporations 168 

Knowledge  of  Illegality 104 

Lack  of  Capacity 244 

Lack  of  Delivery 244 

Lands    69 

Larceny    423 

Law,  Common    9 

Law,  Definition  of  7 

Law  of  Partnership 163 

Law,  Source  of 10 

Law,  Systems  of  9 

Law,  Where  to  Look  for 11 

Lawrence  v.  Fox 75 

Lawyers   17 

Leases    435 

Leases  of  Chattels   291 

Legal  Duty  62 

Legal  Title    284 

Liability  of  Agent 144 

Liability  of  Bank  Officers 225 

Liability  of  Directors  224 

Liability  of  Officers 224 

Liability  of  Partnership  165 

Libel   409 

Limitations,  Statute  of 63 

Limited    190 

Limited  Partnership   188 

Liquidated  Claims   61,  112 

Liquidated  Contracts 58,  59 


COMMERCIAL    LAW  475 

Page 

Liquidation  of  Partnership 188 

Lost  Certificates   255 

Magazine  Subscription   55 

Mail  Contracts   48 

Manslaughter    422 

Marriage   69 

Married  Women 82,  83 

Master  and  Servant 121,  149 

Meeting  of  Stockholders 208 

Mistake    100,  116 

Misstatements  of  Opinion 97 

Moral  Law 7 

Mortgage,  Assumption  of 314 

Mortgage  Deed  of  Trust 218 

Mortgages    291,  304 

Mortgages,  Chattel  291 

Necessaries 80 

Neghgence    281,  416 

Negligence,  Contributory  416 

Negligence  of  Agent 160 

Nogotiable  Instruments  Act 378 

Negotiable  Paper  378,  465 

Negotiability    364,  380,  394,  403 

Newspaper  Subscriptions 55 

Non-Assignable  Rights  106 

Novation   108 

Offer  and  Acceptance 32,  51 

Open  Receipts 371 

Operation  of  Law 147 

Opinion  97,  275 

Options    34,  35,  94 

Oral  Agreements  38 

Ownership  of  Stock 240 

Ownership,  Rights  of 259 

Part  Pajmient  65 

Partial  Assignments  109 


476  COMMERCIAL    LAW 

Page 

Parties,  Capacity  of  74,  77,  264 

Partner  by  Estoppel    171 

Partner,  Powers  of   177 

Partner,  Secret   190 

Partner,   Silent    190 

Partnership   163,   188 

Past   Consideration    61 

Patents    448 

Performance    87 

Performance  Excused   87 

Performance  of  Contracts   86 

Performance,   Specific    303 

Personal  Property 258,  259 

Photographs    15 

Power  of  Attorney  105,  125 

Powers  of  Corporations 197,  221 

Powers  of  Partners   177 

Preferences  430 

Principal  and  Agent 121 

Principal,  Liability  of  142 

Principal,  Rights  of 142 

Principal  Undisclosed  141 

Privilege   411 

Probate  of  Wills 331 

Promise,  Conditional   35 

Promise  to  Marry   69 

Promissory  Note    379 

Promoters   202 

Property,  Personal   258,  259 

Property,  Real  259,  276,  298 

Proof  of  Claims   434 

Prospectus    230 

Protest 401 

Proxy   144,  214 

Qualified   Indorsements    399 

Quasi  Contracts   115 


COMMERCIAL    LAW  477 

Page 

Railroad  Commissions  345 

Ratification    81,  128,  142 

Real  Estate 69,298 

Real  Property   259, 276,  298 

Receipt  in  Full 113 

Receipt  of  Acceptance 53 

Receipts   59 

Receipts,  Trust 355 

Receipts,  Warehouse 370 

Receiverships 430 

Reimbursement  136 

Rejection 42,  43 

Releases   59 

Renunciation 113,  147 

Repudiation    95 

Restraint  of  Trade 101 

Revival  of  Debts 66 

Revocation 42,  146,  330 

Rewards  46 

Rights,  Non-Assignable 106 

Rights  of  Ownership 259 

Robbery   424 

Safe  Deposit  Companies 372 

Sale  of  Goods 71 

Sales  Act  287 

Sales,  Fraudulent  285 

Sales  of  Land   69 

Sales  of  Personal  Property 260 

Sealed  Contracts   27 

Sealed  Powers  of  Attorney 126 

Seals    27 

Searches,  Title 319 

Secret  Partner 190 

Securities  231 

Self-Defense  409 

Set-Off    436 


478  COMMERCIAL    LAW 

Page 

Servant,  Master  and 121,  149 

Service  of  Agent 132 

Sherman  Anti-Trust  Act 206 

Shipper's  Load  and  Count 361 

Side  Compensation 134 

Silence  Gives  Consent 53 

Silent  Partners 190 

Simple  Contracts 29 

Slander  409 

Source  of  Law 10 

Special  Agents 141 

Spent  Bills   363 

Specific  Performance  303 

Statute  of  Frauds 67 

Statute  of  Limitations 63 

Stock,  Attachment  of 248 

Stock  Certificate,  Theft  of 244 

Stock,  Dividends  on 222 

Stock  Held  in  Trust 250 

Stock,  Issue  of   215 

Stock,  Ownership  of 240 

Stock,  Power  to  Sell 251 

Stock,  Transfer  of   238 

Stockholders    208 

Stoppage  in  Transit 284 

Surety  Companies 446 

Suretyship    440 

Systems  of  Law 9 

Tenders  40 

Termination  of  Agency  145,  147 

Termination  of  Contract 86 

Termination  of  Partnership   185 

Termination  of  Offer  44,  45 

Testamentary  Capacity 325 

Theft  of  Stock  Certificate 244 

Title   265,  276 


COMMERCIAL    LAW  479 

Page 

Title  Searches   319 

Torrens  Law   317 

Torts 142,  205,  405 

Torts  of  Agent 142 

Trade  Marks  456 

Trade  Names 456 

Trade,  Restraint  of 101 

Transit,  Goods  in 362 

Transit,  Stoppage  in   284 

Transfer  of  Property    96 

Transfer  of  Stock   238 

Trust,  Deeds  of 317 

Trust  Receipts 355 

Trustee    250,  251,  252,  253,  340 

Trustee  in  Bankruptcy 432 

Trusts 339 

Trusts,  Voting 215 

Ultra  Vires 199 

Unauthorized  Assignment   243 

Unconditional  Promise   385 

Undue  Influence   99 

Undisclosed  Principal  141 

Unenforceable  Contracts  26 

Unfair  Competition   457 

Upiform  Partnership  Act 164 

Uniform  Transfer  of  Stock 238 

Unilateral  Contracts  26 

Unindorsed  Certificate 256 

Unliquidated  Claim   112 

Unliquidated  Contracts 59 

Use  of  Language 51 

Usury    466 

Vendor's  Lien   304 

Void  Contracts 26,  81 

Voidable  Contracts 26,  66,  78,  81 

Voting  Trusts  215 


} 


480  COMMERCIAL    LAW 

Page 

Warehouse  Receipts    370 

Warehousemen    344 

Warehouses    344 

Warranty  144,  274 

Warranty,  Breach  of 281 

Warranty,  ImpHed  277 

Warranty  of  Agent  144 

Wife,  Husband  and 249 

Wills  322 

Witnessed  Power  of  Attorney 126 

Workmen's  Compensation  Act 154 

Writing   67,  72 

Written  Contracts 38,  72,  1 13 

Written  Contracts,  Alteration  of 113 

7.23. 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 


UNIVERSITY  OF  CALIFORNIA 

AT 

LOS  ANGELEB 

T  TRD  APV 


3  1158  01018  9784 


AA    000  968  097    6 


